July 31, 2012

Senator Inhofe: 9x Cost for Biofuels Is Too Much, but 29x Was OK for Synthetic Fuels

Jim Lane

Arch-critic of the cost of military biofuels — Oklahoma Senator
James Inhofe — comes under scrutiny over earmarks for natural
gas-based military fuels that cost 29 times more than conventional
fuels.

In Washington, the battle
over advanced military biofuels took a turn for the bizarre this
week, amidst revelations that a leading Senate sponsor of
legislation to restrict Navy purchases of advanced biofuels, James
Inhofe of Oklahoma, had previously secured earmarks for Syntroleum
Corporation (SYNM)
to produce natural gas-to-liquid alternative fuels which were priced
29 times higher than conventional fuels.

Overall, Syntroleum reported receiving nearly $6 million from 2002,
2004 and 2006 joint development contracts with DoD, stemming from
the earmarks by Inhofe. Syntroleum also reported a 2006 contract for
$2.3 million for the sale of 104,000 gallons of gas-to-liquid jet
fuel to DoD, for testing in Oklahoma-based B52s.

According to the most recent disclosures at opensecrets.org, Senator
Inhofe is an investor in BlackRock, which is the largest shareholder
in Syntroleum as of March 31, according to SEC filings, through
BlackRock Institutional Trust and BlackRock Fund Advisors.

Paying 29 times for natural gas fuels than conventional fuels

Adjusting for inflation, the $2.3 million contract in 2002 dollars
equates to $2.93 million in today’s dollars, or $28.21 per gallon.
Back in 2002, jet fuel was selling at considerably less than today –
at an average price of 75 cents per gallon in the second half of the
year, according to indexmundi.com.

Overall, the cost of the natural gas-based alternative fuel was 29
times more than the cost of conventional fuels at the time, and cost
more, per gallon, in today’s dollars than the Navy’s advanced
biofuels program.

At the time, the Senator said “Syntroleum’s gas-to-liquids barge
project holds great promise for alternative fuel production in a way
that has both civilian and military applications. The benefits of
this kind of technology to our country are substantial and I am
confident that these funds will aid in the further development of
this process for the benefit of our nation.”

The Senator took a different line on the benefits of the military
advanced biofuels program.

“A fiscally responsible amendment that I authored
in the FY13 NDAA,” he wrote, “prohibits the DOD from
purchasing high-cost alternative fuels if traditional fuels are
cheaper. I pledge to continue working with my colleagues to ensure
that President Obama’s far left agenda does not impact military
readiness and our national security.”

Alternative fuels: good for military readiness then, bad for
military readiness now

At the time of the initial $3.5 million grant to Syntroleum to
develop alternative fuels from natural gas, Inhofe took a different
line on the impact that developing alternative fuels would have on
military readiness and national security.

“Tulsans can be very proud that Syntroleum’s advanced technology is
now poised to make a significantly increased contribution to
military readiness and national security,” Inhofe said at the time
of the 2002 award. “I especially applaud all the workers at this
company. Their efforts have been recognized, and their future
endeavors are going to make a real difference for America.”

By 2012, Senator Inhofe was no longer applauding all the workers at
the company, and predicting that their future endeavors would make a
real difference for America.

One of Syntroleum’s future endeavors, as it happens, is its Dynamic
Fuels joint venture with Tyson Foods that won the Navy contract for
advanced alternative biofuels that attracted such strong criticism
from the Senator.

“Sen. Inhofe’s concern in this particular case as it deals with the
Department of Defense is that the alternative is cost prohibitive,”
Inhofe spokesman Jared Young told CNSNews.com last December. “The
Department of Defense should not purchase alternative fuels that are
priced 9 time higher than conventional fuels –$26.75 per gallon to
approximately $2.85 per gallon — because those extra costs will
further eat away at other necessary budget items such as operations,
maintenance, training, and modernization.”

The program for Syntroleum’s proposed Flexible JP-8 (single
battlefield fuel) Pilot Plant program was remarkably similar in
structure to the advanced biofuels program later undertaken by the
US Navy with Dynamic Fuels. Joint development grants were given to
the company to design a marine-based fuel-production plant, and
funding was provided to test synthetically-made (gas-to-liquids)
JP-8 fuel in military diesel and turbine engine applications, and a
production contract for small batches of alternative fuels was
issued to the company.

The bottom line

Well, clearly there’s a credibility gap here.

There seems to be ample evidence that Senator Inhofe is intimately
aware of the costs of developing and testing alternative fuels in
small quantities. It appears to be a simple case of playing
political games, by criticizing Dynamic Fuels for selling advanced
biofuels for $26 per gallon, when the Senator himself won an earmark
requiring the military to purchase even more expensive natural
gas-based fuels from Dynamic’s parent.

Paying nine times as much for test quantities of advanced biofuels?
“Far-left agenda.”

Paying 29 times as much for test quantities of alternatives to
fossil fuels made from, ahem, more fossil fuels? “A real difference
for America.”

Greenshift's New Extraction Technology a 62% Improvement, but Challenges Abound

by Debra Fiakas CFA

Source: Chicago Board of
Exchange

Two months ago GreenShift
Corporation (GERS:
OTC) ambitiously promised to introduce by the end of 2012 an
improved corn oil extraction system. The company has
developed technology to extract oil more from corn used as feedstock
by ethanol producers. GreenShift claims its first system is
recovering an incremental 0.8 pounds of oil per bushel of corn in
current installations. The new system - called
COES II - is expected to increase the oil yields
to 1.3 pounds - a 62% improvement that will put more
profits in ethanol producers’ pockets.

Incremental profits can make a difference in the economics of
ethanol plants that are squeezed between the costs of natural gas
required to fuel to the distillation process and corn feedstock on
the one side and ethanol selling prices on the other.
Recently ethanol producers have benefited from low natural gas
prices. However, corn selling prices have spiked in the last
couple of weeks on the apparent loss in corn crop due to the 2012
drought. Any hope of lower corn feedstock prices this fall have
been pulverized to dust right along with the huge corn plantings
farmers had pledged at the 2012 season start.

Those profit-sapping conditions might seem favorable for selling
GreenShift’s performance enhancing technology. However, the
system requires capital that some ethanol producers might find
hard to come by. Last year Valero Energy (VLO:
NYSE) announced it would be installing corn oil extraction
equipment at four of its plants by the end of 2012. Valero
plans to sell the higher-value corn oil into animal feed
markets. It expects to cover the capital expenditure with
incremental earnings within two years.

Even after ethanol producers gather together enough capital to buy
the equipment Greenshift faces a bit of competition. Those four
corn oil extraction systems Valero is installing this year are
coming from ICM, Inc., which
offers a menu of technologies to ethanol producers and grain
processors. GEA
Westfalia Separator (a subsidiary of GEA Group AG)
specializes in liquids separation across a variety of industries.
Likewise Flottwegg
AG sells equipment for corn oil extraction among a selection
of equipment for the process industries. Greenshift is
sensitive to the competition and has been in legal tussles with
all three companies since the U.S. Patent Office awarded
GreenShift a patent for its COES I system in 2009.

A legal victory may come too late for GreenShift. At the end
of March 2012, the company reported less than a million dollars in
cash on its balance sheet. GreenShift is not profitable and
has an accumulated deficit of $161.9 million. Its operations
appear to need approximately $500,000 in cash support per
quarter. GreenShift has indicated it plans a capital raise
this year to make that bridge to the more competitive COES II
system.

GreenShift shares are quoted near a penny on an over-the-counter
listing service. It is an illiquid stock and often has no
quoted bid or ask price. Any investor taking a position in
the stock on the new product introduction should do so with their
eyes wide open and a willingness to risk all. On top of
capitalization issues, both target markets and capital markets
present challenges for GreenShift.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

July 30, 2012

SolarWorld Among 20-Plus Manufacturers to File EU Complaint

A SolarWorld coalition of European-based manufacturers officially
filed a trade complaint in Brussels late Wednesday, eliciting a
strong response from leading Chinese manufacturers and setting the
stage for a process that could further shake up the global solar
industry.

SolarWorld’s (SRWRF)
Germany-based operation was certainly emboldened by the thus-far
successful initiative launched by its American subsidiary in the
United States, where modules with Chinese cells from leading
manufacturers are being hit with preliminary tariffs totaling about
35 percent. Now, SolarWorld turns its attention to the far larger
European market, which has gone through a remarkable growth period
with installations dominated by Chinese products. In 2011, about 74
percent of the world’s new installed capacity came in Europe.
Meanwhile, some of the European companies that a few years ago
dominated the solar industry have filed for insolvency while citing
their inability to keep up with Chinese competitors.

While the scope of the request made to the European Commission
remains unclear, SolarWorld has cemented its place as the company
that continues to drive the effort to push back against Chinese
products. The company for months has been building a coalition of
companies willing to file a complaint. The complaint was officially
launched by EU ProSun, a group of more than 20 European solar
manufacturers. None of the companies was named in a release issued
by the newly formed group, but it did indicate that its president
will be Milan Nitzschke, a vice president for SolarWorld AG.
According to Bloomberg, Nitzschke said the group includes companies
from Italy, Spain and Germany, and that it includes German
manufacturer Sovello.

“Chinese companies have captured over 80 percent of the EU market
for solar products from virtually zero only a few years ago,” he
said in a press release. “EU manufacturers have the world’s best
solar technologies but are beaten in their home market due to
illegal dumping of Chinese solar products below their cost of
production.”

A short time after SolarWorld filed its American complaint, a group
of American companies and large Chinese manufacturers launched the
Coalition for Affordable Solar Energy (CASE), arguing that the
low-cost panels are helping the industry achieve its goal of
widespread adoption. A similar divide is likely to follow the EU
case, especially as many European nations see their goals of a
renewable-powered grid coming to life. The European-based Alliance
for Affordable Solar Energy (AFASE) so far has 70 members including
material suppliers, equipment manufacturers, project developers,
installers and maintenance companies.

Findings in the EU are generally less punitive than in the United
States, according to a Brussels-based trade attorney, and the
commissioners who ultimately make a ruling can take into account
external factors such as the impact on the overall economy and the
effect on the environment. The U.S. Department of Commerce does not
consider those factors when issuing a ruling.

According to published reports following a media briefing in China
on Thursday, Yingli (YGE)
Solar's chief strategy officer Wang Yiyu said “the investigation
would also trigger a whole-scale trade war between China and the EU,
which would cause huge losses to both parties.” He was joined at the
briefing by SunTech (STP),
Trina (TSL)
and Canadian Solar (CSIQ).
According to the companies, almost 60 percent of its exports went to
the European market in 2011, and a trade ruling on behalf of
SolarWorld would have a devastating effect on Chinese manufacturers.

A trade investigation in Europe could hasten China’s move to expand
into emerging markets. Chief among those is the emerging Chinese
domestic market, would could install 6 gigawatts (GW) this year
alone with a target of 21 GW by 2015. There’s already talk that
those numbers could push upwards as the nation starts its march to
become the world’s leading installation market. China is also making
efforts to tap into the expanding Japanese and Indian markets while
beginning to invest in peripheral Asian nations. China is also
moving toward markets like Chile, where the installations are few
but the potential is immense.

The European market, meanwhile, has been surprisingly resilient —
mostly because of those plummeting PV prices. However, Europe as a
whole is on a path to a major scale back in its PV policies as
struggling nations look to cut government spending in the face of an
EU debt crisis.

Steve Leone is an Associate Editor
at RenewableEnergyWorld.com.
He has been a journalist for more than 15 years and has worked for
news organizations in Rhode Island, Maine, New Hampshire, Virginia
and California.

The concern was that the company would be issuing 8 million
shares for the assets, but the company has revealed very little
about the projects. With the federal Production Tax Credit
(PTC) set to expire at the end of 2012, many development projects
will not be viable. In the absence of more information, the
entire four gigawatts of potential could effectively be worthless.

On the other hand, the loss of the
PTC doubtlessly affected the price paid for the assets.
Champlin/GEI had invested “almost $20 million” in the
pipeline so far, and Western Wind is acquiring the pipeline for 8
million shares, at a notional value of $2.50 per share
($20 million.) At the current market price of only $1.25 a
share, that’s $12.5 million, but if we consider Western Wind’s net
asset value per share, which I
put at over $5 per share, then the company is paying over
$40 million for the assets.

What is the development pipeline worth? I think it’s safe
to assume that most of the 4,000 MW of projects will not be built
without the PTC. But the company has spoken of a near term
project 75 MW project Hawaii, which they say is viable without the
PTC. Given that Hawaii
has extremely high electricity prices (most
electricity is generated from oil) and an aggressive renewable
energy mandate, it’s quite believable that a project in Hawaii
would be economical without the PTC, despite the high cost of
building anything in Hawaii.

The company has also claims that other projects in the pipeline
will be viable without the PTC, but has given few details.

“Trust Me”

In response to investor’s questions during the conference call,
President and CEO Jeff Ciachurski was not particularly
forthcoming. He says he cannot reveal more details about the
projects in the pipeline because it would provide ammunition to
opponents who want to reduce the price paid for wind power in the
power purchase agreements he negotiates with utilities. Like
investors’ concerns about lack of transparency, Ciachurski’s
worries are valid. If the company tells investors it will
receive a high rate of return on a project, utility customers will
use that statement in front of regulators to try to reduce the
amount the utility pays the company for electricity. In
other words, information is a two-edged sword.

From his tone in conference calls, Ciachurski seems offended by
the implication that the Champlin/GEI deal will not be a good one
for investors. He asks us to consider his track record,
management’s ability to grow its assets and projects. The
value of Western Wind’s projects has been validated in two ways:
by the in-depth due diligence of the leading banks among the
project lenders, and by the independent valuation the company
commissioned last year, on which I based my $5 to $6 valuation of
the stock.

Western Wind’s 2004 annual report shows only $200 thousand in
liabilities on the balance sheet. On March 31, 2012, the
most recent quarterly report shows $360 million
in liabilities. Over those seven years, the amount of
money banks were willing to lend grew at a compound annual growth
rate (CAGR) of 187%. The book value of assets on the balance
sheet also grew, from $3.3 million to almost $400 million, a 93%
CAGR, although this greatly understates the growth in the value of
Western Wind’s assets, since they are shown on the balance sheet
at cost, not on a discounted cash flow basis.

Data source: Western Wind financial
statements and press releases. Note that assets are shown at
book value, and are much lower than they would be in a DCF
analysis.

The company has issued shares to fund some of this growth: shares
outstanding rose six-fold, a CAGR of 27%, but not in
a dilutive way. Even using just the balance sheet
values of net assets, net assets per share grew from $0.29 to
$1.85 (after the receipt of the reduced cash grant), or over 30%
CAGR.

Given that track record, I’m willing to give Ciachurski and
his team the benefit of the doubt on the Champlin/GEI pipeline.
I agree that Western Wind could reveal more about
their pipeline than they are without tipping their hand in PPA
negotiations, such as a list of projects giving their locations,
potential megawatts, wind regime, and a rough idea of how much
progress has been made on them.

In short, I don’t like the secrecy, but I’m willing to
put up with it because I’m able to buy Western Wind shares at a
tiny fraction of what I see as their true value.

Data source: Western Wind financial
statements and press releases. Note that assets are shown at
book value, and are much lower than they would be in a DCF
analysis.

Rumors

There are some who say any trust in Ciachurski is misplaced.
I’ve received comments
on my articles saying that “ the executives have been
plundering the company for years with impunity,” but
if such plundering occurred on any large scale, we would
not have seen the asset growth discussed above. I was also
contacted by a Vancouver-based private investigator, who claimed
to be working for a group of investors who had been swindled by
Ciachurski. He asked me to publish his research
linking Ciachurski to convicted felons. But he was
unable to substantiate the linkage, other than to repeat hearsay
from unidentified individuals.

The company says such allegations are the work of a group of
Vancouver based hedge funds, who have been buying the stock near
current prices ($1.25 a share) and want to sell the company to a
buyer like Algonquin Power (TSX:AQN, OTC:AQUNF),
which made and offer of $2.50 a share last October. Even if
the unsubstantiated allegations about Ciachurski “plundering
the company” were true, the plundering has been minimal, since
shareholder value has increased substantially during the
supposed plundering. That’s hardly typical of a
company with unscrupulous management: Shareholder value in such
companies almost always goes down, not up. We only have to
look to wind turbine and solar manufacturers to see many
examples of honestly run renewable energy companies with rapidly
dropping shareholder value.

Although I’m not averse to a quick profit (most of my stake, like
that of the Vancouver hedge funds, was acquired around the current
price), I agree with Ciachurski that the best time to sell
Western Wind will be after the company’s recently completed
projects have been producing cash for a few quarters, and the
Yabucoa solar project in Puerto Rico is complete. The
company expects that each of the next seven quarters will be
record quarters for revenue and earnings, and they can say this
with a good degree of confidence. The revenue in question
depends only on the wind blowing, the sun shining, and utilities
with good credit ratings paying for the power generated.

At $1.25 a share, I don’t see much downside. If the
Vancouver funds manage to force an immediate sale, I get a quick
2x profit. If Ciachurski gets his hoped for sale in
2014, I get a 4x or even 8x profit after only a couple years.
That seems worth the wait.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

Western Wind Expects Full Cash Grant for Windstar

Tom Konrad CFA

The
Windstar Wind Farm. Photo credit: Western Wind Energy

On July 10, shares of Western Wind Energy (TSX:WND, OTC:WNDEF)plummeted because of a
$12.2 million shortfall in the 1603 cash grant from the US
Treasury for the company’s Windstar wind farm compared to the
application. In order to reassure skittish investors, the
company held a conference call on Monday, July 16.

On the tenth, I thought that investors should write off the
1603 cash grant shortfall, despite the fact that the company
intended to send a delegation to Washington consisting of company
management along with their advisers in order to argue for the full
cash grant. I wrote,

“I’m sure the company was already engaging in
discussions with the Treasury while the grant was being
processed. Why should new discussions achieve a different
result?”

Western Wind President and CEO Jeffrey Ciachurski disagrees.
Here is his argument:

The Treasury was hit by a flood of 1603 tax grants for rooftop
solar leaseback projects with “inflated” developer fees.
As a result, the Treasury went against IRS guidelines and
put a 5% cap (as a percentage of other expenses) on all
developer fees for both solar and wind projects.

Wind projects are generally more complex than solar projects,
and typically have developer fees at 10% to 30% of costs.

Western Wind’s independent advisers’ opinion is that a
developer fee between 27% and 41% of assets would be fair for
Windstar, based on the fair market value of the project.

Western Wind applied for a relatively conservative 20%
developer fee for Windstar.

Western Wind’s earlier Mesa project had a 15% developer fee,
which was granted in full.

Ciachurski went on to say that, in 95% of
cases, Treasury is right about developer fees, but in
the case of Windstar and a few other extremely profitable wind
farms, they are wrong, and so he and his advisers need to go to
Washington to make the case in person.

Will they succeed? I hesitate to predict. For me, I
think it’s best to wait and see.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 28, 2012

A123 Systems, An Object Lesson In Toxic Financing

John Petersen

July has been a ghastly month for stockholders of A123 Systems (AONE)
who've watched in horror as the stock price collapsed from $1.30 on
July 5th to $0.49 at Friday's close. While there was unfavorable
news of a director resignation yesterday, all the other news over
the last month has been positive, at least at first blush. In my
view the market activity was both predictable and directly
attributable to recent toxic financing transactions that will have A123
printing stock faster than Ben Bernanke is printing dollars for the foreseeable future. I'd
love to be able to tell A123 stockholders their pain is over, but
it's not.

Toxic note and warrant financing

On May 11th, A123 announced
that it had closed a $50 million offering of convertible notes
and warrants. The principal was payable in 26 semi-monthly
installments commencing on July 1, 2012 and could, at the company's
option, be settled with cash or with shares of A123's common stock
valued at the lesser of $1.18 per share, or 82% of the volume
weighted average price, or "VWAP," of the common stock for the five
trading days immediately preceding a settlement date, but in no
event greater than the VWAP of the common stock on the last trading
day before the settlement date.

Since the number of shares issuable upon conversion of the notes and
exercise of the warrants exceeded the limits of A123's Certificate
of Incorporation and the transaction required formal shareholder
approval under Nasdaq listing rules, $30 million of the offering
proceeds were deposited in a segregated bank account pending:

Stockholder approval of the note and warrant transaction;

Stockholder approval of an increase in the company's
authorized shares; and

Effectiveness of a resale registration for the common shares
underlying the notes warrants.

The necessary stockholder approvals were received on June 29, 2012
and the resale registration statement was declared effective as of
4:00 p.m. on July 5th. By the time the registration statement was
declared effective, the payment terms had been modified slightly
to increase the number of installments to 29 and increase the
amount payable in each of the first three installments to 1-2/3
the base amount, but the other terms remained unchanged.
The segregated funds were promptly released to the company.

The notes are a classic example of "death spiral financing" where
payments are made with discounted shares of common stock and the
number of shares required for a payment increases as the stock price
declines. At an assumed stock price of $1.30 a share, A123 would be
able to make a $2 million installment payment by issuing 1,876,173
new shares of common stock. At an assumed stock price of $0.65 a
share, it would take 3,752,345 new shares of common stock to make
the same $2 million payment. In both cases, the market value of the
stock used to make the payment would be about $2.4 million, but only
if the noteholder who received stock instead of cash sold quickly
enough to capture the current market price.

Toxic equity financing

On July 6th A123 announced
that it had signed agreements to sell 7,692,308 shares of its
common stock, together with warrants to purchase additional shares
of common stock, for gross proceeds of $10.0 million. While the
press release had the look and feel of an ordinary financing
transaction, I was troubled by a sentence that said, "The number
of shares of Common Stock issuable upon exercise of the warrants
(which have a nominal exercise price) is based on a fixed 18%
discount to the volume-weighted average price, or VWAP, of our
common stock on specified trading days during two measurement
periods over the next three weeks." Since I was surprised that
the offering went off without an obvious discount to the previous day's
closing price, I decided to dig a little deeper in an effort to
better understand what the "real deal" was.

I found my answers in the SEC
registration statement for the equity offering, which included
copies of the Prospectus and the associated warrant agreement.

When I read the Prospectus I learned that the "nominal exercise
price" of the warrants was $.001 and the structure included an
automatic cashless exercise for the warrants. So the investors were
effectively buying 7.7 million shares on day one and expecting to
receive two additional tranches of "free shares" on the 12th and the
30th of July.

Using the formulas in the Prospectus and warrant agreement, I
calculated that 843,628 additional shares would be issued in each
tranche if the market price remained stable at $1.30 per share
through the exercise dates. By the time I accounted for the
warrants, it was clear the original deal would result in the
issuance of 9,379,564 shares for gross proceeds of $10 million, or
an effective price of $1.07 per share.

In light of A123's recent troubles, I didn't find a discount of 18% from
the market price particularly troubling. I was, however, concerned that the
terms might create an incentive for aggressive investor behavior, so I
made a mental note to re-run the numbers at the end of the month to
see how it all worked out.

The outcome was a textbook example of what can happen when the
number of shares to be issued in the future is contingent on the
future market price of the underlying stock.

During the period between the closing date and the first warrant
exercise date, A123's price fell to $0.88. So the VWAP used to
calculate the number of free shares issuable to warrantholders was
approximately $0.9167 instead of $1.30. When I ran that VWAP value
through the calculations specified in the Prospectus and warrant
agreement, I got to a net cashless issuance of 2.8 million shares,
compared to the 843,628 shares that would have been issued if the
price had stayed stable.

By the second warrant exercise date, A123's price had fallen to
$0.49. So the VWAP used to calculate the number of free shares
issuable to warrantholders was approximately $0.5367 instead of
$1.30. When I ran that VWAP value through the calculations specified
in the Prospectus and Warrant Agreement, I got to a net cashless
issuance of 7.5 million shares, compared to the 843,628 shares that
would have been issued if the price had stayed stable.

Between the original issuance and the two warrant tranches, A123
ultimately sold 18 million shares of common stock
for gross proceeds of $10 million, or an effective price of $0.56
per share. The market did not respond well to the rapid increase
in the number of shares in the hands of willing sellers.

An Excel spreadsheet with the key Prospectus disclosures and
important warrant agreement terms, along with market price data and
detailed exercise price calculations can be downloaded
from my Dropbox.

What it means for stockholders

My first, last and only experience with a price linked conversion
formula was in the late 80s when one of my clients sold a preferred
stock that was convertible into common stock for 75% of the market
price on the conversion date. The investor that provided the
financing proved to be far less friendly than management expected. A
few months after the offering the investor grew disenchanted with
the way things were going. Instead of selling its preferred stock,
it began to aggressively sell common stock into the market, which
drove the price down to a very distressed level. It then converted
the preferred stock into common stock for 75% of a bargain basement
price. By the time the smoke cleared, the investor was my client's
biggest stockholder and management was seeking new employment.

I've seen dozens of comparable proposals since then and my clients
have wisely rejected them all.

The big problem with price linked conversion ratios is that
aggressive selling behavior has no negative consequences for the
investor. If aggressive selling drives the price down, the investor
simply gets more shares at an even lower price. The outcomes aren't
always catastrophic for existing stockholders, but they're
invariably painful.

Over the last couple months, A123's financing activities have
created two scenarios that are likely to result in a year of market
problems. While the worst may be over from the equity offering, it's
impossible to tell whether the warrantholders have already sold the
7.5 million shares that will be credited to their accounts on
Monday. While the equity offering was a problem because it created
two discrete opportunities for aggressive selling, the debt offering
created 26 opportunities that will come along every other week for
the next year.

I'm usually bullish on stocks that have been beaten down to
unreasonably low levels by misfortune and unforeseen events. In
A123's case, however, the financing structures the company put in
place to help it overcome its business problems have created a toxic
supply overhang that virtually guarantees significant future price
erosion.

Under the circumstances, I believe A123 is not a suitable investment
for anybody but professionals.

July 27, 2012

Lime Energy, or Lemon Energy?

Tom Konrad CFA

Last
week, when Lime Energy (NASD:LIME) announced
that an internal investigation by its audit committee had
revealed up to $15 million in misreported revenue, my first
instinct was to sell, especially because the misreported
revenue included not only revenue assigned to the wrong period,
but possibly completely fictitious revenue.

"The revelation that the company may have recorded
“non-existent revenue” is a major concern. Somewhat less
concerning is “Revenue being reported earlier than it should have
been,” which is a violation of the matching principle, and is a
relatively easy mistake to make and can be readily forgiven if
properly restated. But the term “non-existent revenue” is a major
red flag... There are only a couple of reasons phantom revenue
could get booked, and most firms have controls in place to make
sure that sources of revenue are verified before they’re booked.
So at the very least, we can say that there are material
weaknesses in LIME’s internal controls. At worst, some relatively
senior person may have misinformed the accounting team. "

The stock had closed (after a suspicious day-end decline) at $2.03
the day before, so I put in limit orders to sell my entire position
at $1.75 when the market opened. LIME opened at $0.83, which I
found shocking because the announcement also said, "[The company]
currently believe[s] that the cumulative adjustment to revenue for
the affected financial statements will not exceed $15 million."

I took this statement as an extremely positive sign. When
there are known accounting irregularities, usually all bets are off,
and executives know that shareholder lawsuits are going to follow in
short order (at least eleven such lawsuits have already been
filed.) For company and executives and the board, the risks of
making a statement like "adjustment to revenue... will not exceed
$15 million" are large, and one sided. If they are wrong about
the $15 million, there are guaranteed to be additional lawsuits,
and, unlike the original accounting problems, they will not be able
to say "we had no idea there was anything untoward going on."
So Lime's board is confident that the scope of the accounting
problems is limited, and does not affect the entire company's books.

Since the $15 million in question is small (Lime's revenues over the
two and a quarter year period were $233 million,) the board audit
committee is saying that the problem is isolated to a small part of
the company, possibly a single, lower level employee. This is
still bad for management, and particularly the CFO, Jeffry Mistarz,
who should have had a system in place to verify all sales. But
it should not put the existence of company at risk, which is why I
think the current $0.90 price of the stock is way too low, and why I
wrote that any
price below $1.25 not only conservatively values the stock,
but leaves an ample safety margin to account for the current
uncertainty.

In short, while it makes sense "to avoid corporate drama that
involves unexpected resignations and unscheduled week-end board
meetings," as Debra Fiakas put it, I disagree with Jabusch when he
says, "until these accounting concerns are addressed - which for us
means a thorough review by an auditor not previously associated with
the firm and clear corrective measures of whatever the underlying
problem turns out to be - we aren’t interested at any price."

In my opinion, there is strong reason to believe that the accounting
problems at Lime Energy are limited in scope, both because of the
$15 million limit mentioned (6.4% of revenue over the relevant
period in question), and because of the buying of stock by company
insiders. Lime's audit committee will put out a full report on
the accounting problems in when they have completed their review,
quite possibly with the help of an independent auditor, as Jabusch
suggests. If that report shows that the improper accounting
was as limited in scope as I believe, the stock will rally
strongly. If only half of the losses associated with the
current uncertainty are recouped, investors who buy the stock at
toady's $0.90 price, will see an immediate gain of 74%.

That gain needs to be compared to the downside risk that the
accounting problems are pervasive, and the whole company is a Ponzi
scheme, and Enron writ small. But Enron's CFO Andrew Fastow
sold 687,445 Enron shares, worth $33.7 million in the three
years leading up to the scandal. He wasn't buying, like Lime's
Mistarz. Even if the problems are more pervasive that I think,
the company should at least be able to be liquidated for something
resembling its tangible book value of about $1 a share.
With the stock already below $0.90, even a liquidation should not
result in catastrophic losses to investors buying now.
Despite this, the current lack of information is forcing many
professional money managers like Jabusch to stay away. Due to the
higher standards of caution usually employed when managing client
funds, Jabush says he has "no business exposing clients to companies
where there is real, public possibility of accounting shenanigans,"
even though he "would consider buying LIME at this point for a
personal account, being fully aware of the risks."

When there is more information out about what has been going on with
Lime's books, the return of such cautious money has the potential to
quickly boost the stock price.
Disclosure: Long LIME

DISCLAIMER: Past performance is not a guarantee or a reliable
indicator of future results. This article contains the
current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as
investment advice or a recommendation of any particular security,
strategy or investment product. Information contained herein
has been obtained from sources believed to be reliable, but not
guaranteed.

Since I concluded that Waterfurnace’s 7 Series heat pumps
were slightly more efficient than Climatemaster’s Trilogy 40
pumps, one of Climatemaster’s district managers pointed me
to third party efficiency ratings conducted according to
standards set by the Air Conditioning, Heating, and Refrigeration
Institute (AHRI). He compared Waterfurnace’s 4 ton unit (the
most efficient 7 Series) to Climatemaster’s 2.5 ton unit
(the most efficient Trilogy 40), noting that the former had a 41
EER at ground loop conditions, while the latter had a 42.1 EER,
according to AHRI.

He concluded that the Trilogy 40 had a slightly higher cooling
efficiency than the 7 Series.

The Efficiency Tango

Had I got it wrong?

I checked with the pros. Scott Lankhorst, President of
geothermal and solar thermal installer Synergy Systems in
Kingston, NY said it was “an apples
to oranges comparison” between 4 ton and 2.5 ton GHPs.

Lloyd Hamilton, a Certified Geoexchange Designer at Verdae,
LLC in Rhinebeck, NY, called this normal marketing. He
says that the only reliable way to compare units is to look at the
operational performance data for the designed condition. The
AHRI-compliant EER and COP numbers allow comparison of two units
so long as they are at the same capacity, but it does not
demonstrate actual performance, “like MPG for cars. … COP, SEER,
and EER become worthless when comparing different types of
equipment” such as air source and ground source heat pumps,
because the testing criteria are different. He calls the act
of picking an choosing GHP models and operating conditions to make
your company’s GHP look more efficient the “Efficiency Tango.”

Both agree that the contractor can mess up the rated efficiency
of a GHP, or even make it perform above specification, with the
wrong (or right) system design and installation.

I don’t have the performance data a geoexchange designer would
use, but there are a lot more publicly available efficiency
numbers than I used in my last article. I put them together
in a pair of bubble charts:

There are three 7 Series models and two Trilogy 40 models, each
of which was tested at full load and part load, under two types of
conditions. The “ground water” series are when the ground
water is pumped up out of the ground for heat exchange; the liquid
water helps heat transmission and results in a higher rating.
The “ground loop” series is representative of the much more
common installation, when an antifreeze fluid (usually propylene
glycol) is pumped through the geothermal loop, which results in
relatively lower efficiency (although still much higher than other
types of heating and cooling equipment.) Even in ground loop
conditions, different heat exchange fluids will result in
different effective inefficiencies. The partial-load
results are the sets of two or three smaller bubbles to the
right (and a little below) sets of larger bubbles of the same
color.

Looking at the charts holistically, I reach the following
conclusions:

The 7 Series is generally more efficient than the Trilogy 40
for heating.

The Trilogy 40 is generally more efficient than the 7 Series
for cooling.

These units operate at dramatically (about 50%) higher
efficiency under partial load. Two-stage heat pumps show
only modest (5% to 15%) efficiency gains at partial load.
This is likely to lead to higher overall efficiency of
these GHPs in practice than the numbers alone might lead you to
believe.

The Trilogy 40 typically operates at lower fluid flow rates
than the 7 Series, which should produce some energy savings from
pumping.

Hence, I revise my earlier conclusion to say that, based solely
on efficiency, the Climatemaster Trilogy 40 will have a definite
edge over the Waterfurnace 7 Series in cooling climates,
while the 7 Series has an efficiency edge in
heating-dominated climates.

Efficiency Isn’t Everything

That said, for most installations, factors other than efficiency
will probably dominate the decision. As noted above,
Waterfurnace expects exclusivity from its dealers, and I expect
Climatemaster and its other major competitors often do the same.
This will make it nearly impossible for a residential
customer to compare the two without having to weigh other factors
such as their confidence in the installer who, as noted above, can
make or break a geothermal installation.

Then there is the Trilogy 40′s Q-Mode. As Dan Ellis,
president of Climatemaster told me in an interview, the potential
savings from using geothermal to generate hot water year round
from the Trilogy’s Q-Mode are likely to dwarf the savings from a
point or two of EER or a fraction of a point of COP. In
fact, Climatemaster designed the Trilogy 40 with the whole system
energy savings in mind, partially at the expense of efficiency
ratings. In a residential setting, Q-Mode (which is
patent-pending to Climatemaster) is likely to make the financial
returns decisively favor the Trilogy 40 in a
head-to-head comparison.

In commercial settings, which typically have year-round cooling
requirements, Q-Mode is unlikely to be important.
Furthermore, the two largest 7 Series heat pumps have higher
capacity than the larger of the two Climatemaster Trilogy 40
models. This should also give Waterfurnace an advantage in
commercial settings, which typically have larger cooling loads
than residential settings.

Ellis promised to send me some data to help quantify the overall
energy savings from Q-Mode, which I plan to return to in a future
article.

Conclusion

For residential customers in warm climates, Climatemaster’s
Trilogy 40 seems like it will be the better GHP value when it
becomes commercially available. In other cases, the
comparison is not as clear cut, and a customer should probably
focus on finding a contractor who can deliver the best
system design and installation possible. That is the only
way to capture the full benefit from either of these
incredibly efficient geothermal heat pumps.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 25, 2012

Put the LIME in the Coconut

by Debra Fiakas CFA

You
put the lime in the coconut and call the doctor woke him up,
I said Doctor! Is there nothing I can take,
I said Doctor! To relieve this bellyache…
-Baha Men

It is best to avoid corporate drama that involves unexpected
resignations and unscheduled week-end board meetings. At least
that is my view. However, the company soap operas can be
entertaining, so I decided to tune into the Lime Energy, Inc. (LIME:
Nasdaq) saga . Based in North Carolina, Lime provides a menu
of energy-saving solutions to utilities and large-facility
owners. Lime's product and service menu includes energy
efficient lighting upgrades, efficient mechanical and electrical
retrofits, water conservation, building weatherization and other
solutions that are aimed at reducing energy bills.

Lime has been relatively successful - at least its
revenue growth suggests it has been capturing market share.
Reported sales were $120.1 million in the year 2011, an impressive
increase over $95.7 million in 2010 and $70.8 million in 2010.
The problem: revenue is now in question. Last week the company
filed a notice with the SEC that an internal investigation
determined some revenue reported in the last two years were
improperly recorded. Some revenue was non-existent and other
revenue was recorded too early.

The stock dropped by 50% in the days following the announcement and
the shareholder lawsuits and law firm investigations were still
piling up a week later. It is a reasonable reaction
- reduce exposure to loss when financial reports are
fraudulent.

Six weeks earlier the chairman
of Lime Energy’s board of directors1 had resigned,
ostensibly due to health reason. Coupled with the revenue
issue, the resignation added a bit of intrigue to the story and a
hint of more wrongdoing. So even though the amount of bogus
and inaccurate revenue amounts to $15 million or less -
that is no more than 7% of total revenue in the two-year
period - the corrected share price reflects a far more
significant problem.

It is a matter of trust. Lime management should all be under
suspicion, especially the chief financial officer1 who
has a bird’s eye view on contracts, orders, billings and
collections. The energy alternative market place is supposed
to be filled with the good guys who are fighting to save the world
from global warming. Instead we find liars who misrepresent
sales. That it is only a 7% fudge makes no difference.

LIME will remain in the
Efficiency Group of our Mothers of Invention Index. The
revenue question will get cleared up. Corrected financial
statements will be filed. Perhaps there will even be changes
in the management team. Then in all probability we will call
the stock oversold and investors will have a chance to pick up a
good company at a cheap price. The equity market is a
wonderful place!

July 24, 2012

Book Review: Public Meltdown

Ben Plotzker

The Vermont Yankee Nuclear Power Plant.

The focus on the public’s view of nuclear plant operator Entergy
(NYSE:ETR) sets Public
Meltdown: The Story of the Vermont Yankee Nuclear Power Plant,
by Richard Watts apart from other nuclear energy books. The
book avoids pro or anti-nuclear positions, and focus on scientific
aspects of the plant, and instead tells the story of one nuclear
plant’s journey through history. That plant is Vermont
Yankee, a General Electric (GE)
boiling water reactor type, the same type of reactors which were
involved in the Fukushima Daiichi nuclear disaster. Vermont
Yankee has a 620 megawatt rated capacity, and is located located in
Vernon, VT, near the corner of the state with New Hampshire and
Massachusetts.

The science behind nuclear energy
is one thing, but the management of a nuclear plant is another.
Public Meltdown outlines the management of a nuclear power plant
owner in the United States. You will learn so much from this book.
It is very important to understand what is allowing my night light
to be on or my laptop to charge. There are usually mixed sources of
sources for electricity, but which sources are more controversial?

In 2010, Vermont legislators voted to shutter a nuclear power plant,
putting the state at odds with the federal government and the
plant’s owner—the Louisiana-based Entergy Corporation
(NYSE:ETR). Public Meltdown explores the debate that roiled
Vermont, including the lawsuits and court action that followed. The
story starts out with the early days of the plant back in the
1970’s, and draws on more than 1,000 news articles to approach the
highly controversial issue with non-bias towards nuclear energy. It
is hard to find a book out there that does so like Public Meltdown.
Every American citizen who consumes electricity from nuclear
generation should read this and understand what is going on with
that nuclear power plant.

In rich, well-researched detail, Dr. Watts tells a story that
spotlights the role of state governments, citizens and activists in
decisions about the nation’s aging nuclear power fleet. A
story that continues today as both Entergy, the nation’s second
largest nuclear operator, and the state of Vermont have appealed the
case to the U.S. Court of Appeals.

Entergy owns 10 nuclear plants in the U.S., so the issues raised in
this book have wider implications beyond just Vermont Yankee.

The book details a series of missteps by the Louisiana-based Entergy
Corporation which owns Vermont Yankee, from inadequate follow-up
after one of the plant’s cooling towers collapsed to misleading
statements to state regulators about tritium leaks from underground
pipes.

Each chapter outlines the important aspects of Entergy’s fight to
keep the plant open, even though many speed bumps arise. This non
fiction book has some cliffhangers of its own because of how history
played out. Anyone interested in energy issues or state’s rights is
highly recommended to read this book.

July 23, 2012

Shifting the Cost of Pollution

by Debra Fiakas CFA

The U.S. Environmental Protection Agency has agreed to review the
recently enacted MATS Rule - Mercury & Air Toxics
Standards that went into effect at the end of 2011. At
least two dozen states and forty utility companies have filed suit
against the EPA over the rule, which is intended to cap mercury
and other toxic emissions as well as particulates. The rules
particularly impact power plants that use coal-fired boilers to
generate electricity. The EPA provides an interactive map to
see where these plants are located. They are predominantly
in the eastern half of the country.

Existing plants have three years to comply. Industry and
power generators should find it child’s play given that the EPA
has been in the business of setting emissions standards for
decades and it appears industry and power generators have for the
most part been compliant. By most accounts emissions
standards have been effective in cleaning up the skies over the
U.S. In the years between 1980 and 2008, sodium dioxide and
nitrogen oxide emissions from industry have been cut by 57% and
from power generators by 40%. The reduction in emissions by
power generators is all the more remarkable given that electricity
use in the U.S. increased by 85% during the same period and the
use of coal has tripled.

MATS is the EPA’s first attempt to reduce mercury emissions.
Mercury seeps into the water supply and the food chain through
fish. It can cause nervous system damage and is a particular
threat for children and pregnant women. The EPS estimated
that the $9.6 billion estimated cost for compliance could be
justified by an estimated $90 billion annual savings in healthcare
costs.

Economists have a term - cost shifting. Put
simply it means that the costs of a good or service are moved from
the person who incurred the cost to another person who is
ostensibly in a better position to pay. Health insurance is
often cited as an example where the costs of healthcare are moved
from the shoulders of the person who incurred the doctor bill to
the insurance company. However, this is a contractually
agreed upon arrangement and the sick person has already paid the
insurance company a premium to assuming the obligation.

Polluters shift costs also. There is no doubt that there is
a cost to be borne for toxic emissions. If left unchecked,
toxic emissions exact a price from everyone in the
community. The public pays for the cost of pollution with
poor health and high medical bills. Yet unlike the
contractual arrangement between the insured person and the
insurance company, there is no formal agreement with the public to
assume the costs of pollution. It is imposed upon them by
lobbyists and lawyers who attempt to block standards that would
focus responsibility for pollution on the source.

Southern Company
(SO: NYSE), an electricity generator and wholesaler,
has been in the forefront of opposition to EPA standards.
Southern Company reportedly spent over $17.5 million lobbying
Congress in between the years 2010 and 2012. Among other
arguments, Southern supported proposals to disapprove and delay
compliance schedules with MATS, as well as to delay the EPA from
setting carbon pollution standards. Southern is among a
number of power generators that belong to the American Coalition
for Clean Coal Electricity.

No one wants to see promising investment projects go awry.
No one likes to feel the long arm of government regulation.
Certainly no one wants to see their utility bill increase.
Nonetheless, it is time that polluters stop shifting
responsibility to innocent bystanders and pass the costs of
emissions to those who benefit from their businesses -
investors and customers. It is time to comply
with regulations and begin emissions abatement.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small
Cap Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein. VNDM is included in
Crystal Equity Research’s The Mothers of Invention Index.

July 21, 2012

Kandi Technologies Bags Largest Single Electric Vehicle Order Ever

Tom Konrad CFA

The Kandi
KD501 Mini-EV to be leased in Hangzhou. Photo by Marc
Chang.

The city of Hangzhou just signed a
strategic cooperation agreement with Kandi Technologies
(NASD:KNDI)
and nine other companies to supply 20,000 electric vehicles (EVs)
for the city’s “pilot” EV leasing program. Kandi is the
only EV supplier to take part; other companies involved will
supply the batteries (Air Lithium (Lyoyang) Co. Ltd.) and charging
by the local utility. The utility will fund construction of
a charging and battery swap station network as well as paying for
the batteries.

The batteries will serve a dual use for grid stabilization,
or Vehicle to
Grid (V2G) technology. The batteries will
be financed by charges to electricity customers because of
this dual use. So, in addition to this being the largest EV
sale ever announced, the project is also effectively the largest
scale trial of the use of EV batteries for V2G. V2G
is a concept much talked about in academic circles, but
so far if has only seen small scale pilot projects in the West.
Part of the problem with implementing V2G is typically
the split incentives between battery owners and the utility.
Battery owners naturally worry about reduced
performance of their very expensive battery packs if they are used
for V2G. The Hangzhou project neatly avoids
this conflict of interest because the utility owns the
batteries, and the EVs are only available for lease.

Financial Impact for Kandi

The program will begin in August, and is scheduled to be
completed by the end of 2013. We can expect Kandi to sell
EVs at a rate of over 1000 per month during implementation.
Kandi’s revenues for each vehicle will be around $6800 per
EV. Kandi’s gross margins are about 25% on its existing
off-road vehicle business, and observers of the company
tell me Kandi would be unlikely to undertake a project if it
earned substantially less than that. We can expect an
increase in gross profit of about $1300 to $1700 per vehicle,
or about $0.70 per share annual gross profit, most of
which will flow through to earnings.

Kandi is already profitable, with trailing earnings of $0.20 per
share (EPS), so we can expect total EPS for 2012 is likely to be
around $0.40 per share, and EPS for 2013 is likely to be around
$0.80 per share based just on this deal and zero growth in the
company’s existing business. The existing off road vehicle
business has been growing rapidly, and additional EV orders seem
likely, so $0.40 and $0.80 EPS in 2012 and 2013 should be
considered a lower bound on earnings, which will most likely be
higher.

China’s Aggressive EV Goals

Kandi’s rapid earnings growth could continue if Kandi
manages to grab a decent share of the 500,000 EVs by 2015 and
5,000,000 EVs by 2020 goals set by the central government.

China is
currently behind in implementing these EV adoption goals, largely because
of the high cost of EVs from Kandi rivals such as BYD (OTC:BYDDY), and lack of charging stations. The
Hangzhou pilot project, with its rapid, utility-financed build-out
of charging stations and inexpensive mini-EVs from Kandi
seems designed to address both these problems.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 20, 2012

Next Economy and Faith for Empiricists

Garvin Jabusch

Let's be clear: Justice is not an immutable law of nature.
Neither math nor physics nor chemistry recognizes justice as one
of the universe's governing principles. The strong, rich, and
powerful have, since long before humans emerged, by and large
taken what they wanted, when they wanted, and never counted the
costs to those they took it from. Despite what Socrates may have
said, justice has forever occurred, at best, in fleeting,
ephemeral flashes. We yearn for a god capable of seeing and
ultimately judging all rights and wrongs -- because we know we
can't be counted on to do it ourselves. Small wonder that the
legend of Robin Hood – the original 99 percenter -- still
resonates after 800 years.

We can say that humanity might change, but that's just another,
kinder, more optimistic lie. We can't. Not as a whole, not within
the time scales required to preserve ourselves. We are descended,
on a time frame of 3.5 billion years, from organisms that
succeeded because they were the best at gathering as much as they
could in the shortest amount of time possible. This has been true
throughout history. And prehistory. And primordial history. It's
too deeply ingrained to switch off or even ignore. We just don't
work that way, and it's time for us to accept that and start
thinking about how to address our problems without
relying on an ultimate goodness in our nature.

So, what, then? How can we approach our main challenges? How can
we arrive at the sustainable, circular, next economy and learn to
live within the various budgets that earth can provide?

In concept, it's simple: Align people's economic interests and
sense of well-being with the best interests of Earth's ecological
totality. Call it next-economy capitalism.

In practice, that's insanely difficult.

It's difficult, because, again, maximizing short-term profit
while ignoring larger costs is humanity's prevailing worldview,
and extracting fossil fuels (especially when subsidized) is a
fantastic way to earn short-term profits. Consequently, the
phalanx of opponents of renewable energy and electric
transportation is impressive and daunting. It's the list of
industries that stand to lose market share and profits as
renewables advance: oil, coal, gas, traditional electric
utilities, and makers of internal-combustion cars.

Given this opposition, rather than lament the slow adoption of
renewables and electric vehicles, we should be proud and even
amazed that we have made as much progress as we have. That's a
testament, really, to two things: the tireless efforts of all
those working for change and, more importantly, the fact that
ultimately renewables just make better economic sense. No matter
how much disinformation gets thrown at people, there's no escaping
the fact that technologies with a zero cost of fuel will
inevitably become cheaper than any extractive industry of the same
or even somewhat larger scale, even, ultimately, natural gas.

But there's the rub, renewables are still such a tiny fraction of
the size of fossil fuel industries that their true potential does
not yet shine brightly in the popular imagination. And when we do
see hints that this tide is turning, tactics are swiftly deployed
to keep the status quo intact. Is it coincidence that large
tariffs are being placed on the world's least-expensive solar
modules just as those modules reach cost parity with coal on the
U.S. electric grid (see "Why
We Pay Double for Solar in America (But Won't Forever)")? Or
that in North Carolina "sea level rise" is pilloried as a "liberal
buzzword?" Facts of science are not buzzwords. Forbidding
developers from planning for accelerated sea level rise will not
protect low-lying communities from storms, nor force insurance
companies to cover them. Placing authoritarianism ("because I said
so" laws) above science and empiricism will simply not work. Folks
who plan for sea level rise are outlaws now? Please.

Given the power of our fossil fuels oligarchs, it seems like
change toward sustainability faces long odds. Who can doubt the
power of the oil plutocrats when there are still huge subsidies
for fossil fuels (the most profitable industry in history), while
renewables (which are actually still in the "kick start" phase
that subsidies are meant to support) get relative pennies. When
the temporary
denial of the KXL pipeline to cross the U.S.-Canada border
quiets critics, while construction both north and south of the
border legs continues unabated. (On this point let's not forget
that the last major
tar sands pipeline spill cleanup is still underway and
costing $800 million.) When there are already over
680,000 deep-injection wells that have pushed more than 30
trillion gallons of toxic liquid into U.S. ground, and yet there
is scarce examination from policy makers? When the U.S. supported
the obviously nondemocratic coup
in the Maldives against a popular, democratically elected
president, Mohamed Nasheed, who happened to be a tireless worker
to limit fossil fuels where possible. Nasheed, who was crusading
to limit global warming to such an extent that he held a symbolic
cabinet meeting underwater, was illegally removed from office with
rhetorical support from U.S. officials.

I think it's naïve to blame this or that administration for
our refusal to slow the growth of our carbon emissions, when it's
clear that in certain areas, oil executives have as much or more
influence as the executive and legislative branches combined.
They're the richest organizations in all of human history, so
that's simply where power resides.

And one assumes big oil will have seen the writing on the wall of
the future by now, and be plotting ways to become the masters of
the next great sources of energy. I hope that's the case, but
other than Total buying
a big piece of Sun Power, I've seen no major moves in that
direction. In fact, as recently as October 2011, I heard an oil
executive at a conference say something very like "yeah, we tried
experimenting with solar in the '70s, but it was just way too
expensive to make a decent value proposition," as though he
thought the audience was credulous and uninformed enough not to
know PV efficiency has improved more than 100 times per dollar's
worth since then.

So leaving global warming, pollution, disease, resource scarcity,
and war aside, the argument we can win is going to be economic:
The best renewables are a better value proposition. At least on a
level playing field. The race is, even after we've come all this
way, to prove that we still have even small reasons for long-term
optimism that we can credibly make this case.

And, fortunately, we do. For as surely as humans are programmed
to maximize short-term gains, we're also fantastic innovators, and
we may have a greater
capacity for adaptation than any other species. And this is
where the most rational of empiricists, who only believe in what
they can observe, can place some modicum of faith. Because when it
comes down to adapt or fail, we will take a big swing at adapting.
And, being much better at adaptation than some of earth's former
dominant species, e.g. dinosaurs, we have a far better chance of
success.

It's now clear that unrestrained burning of fossil fuels is
backing us into an existential corner. Therefore, we will
hopefully try to adapt by limiting fossil fuels' use where we
reasonably can. (The struggle between short-term individual gain
and larger picture group selection that ultimately benefits
individuals as well was recently discussed in an
editorial by E.O. Wilson, who argued that we're the products
of both types of evolutionary pressures, and that we apply
whichever is most appropriate to given circumstances. For what
it's worth, I believe that the primary ideological divisions in
this country are straightforward manifestations of Wilson's
approach to this "multi-level natural selection," and that
evolution proves that we need both.)

So to tie our remarkable capacities for innovation and adaptation
to our economic and social well-being is clearly now, as it has
always been, the way forward. Plus ca change… Most
directly, we need to accelerate investments into the best, most
profitable, most effective renewables, water solutions,
agricultural solutions, and all other sustainable manifestations
of technologies required to run an economy. And we need to invest
in them until it becomes so obvious that they're the most
efficient multipliers of human effort that all ideological
considerations fall by the wayside, the way oil replaced coal, the
way coal replaced water wheels. We know how to be better, more
innovative, and smarter at accumulating profits and wealth. As
computer science pioneer Alan Kay put it,
"the best way to predict the future is to create it."

Western Wind Energy Receives $78.3M Cash Grant: Good News, Bad News

Western Wind Energy (TSX-V:WND, OTC:WNDEF)recently announced
that it had received the much delayed 1603 cash grant for its 120
MW Windstar wind farm, which was completed last year.

Good News, Bad News

The good news is that the grant was finally issued after over a
month and a half after the Treasury’s normal 60-day
cycle of considering the grants. This will come as
a relief to investors who may have been wondering if the
grant might be denied, although I concluded that there was not
much chance of Western Wind not receiving the grant when I looked
into it two weeks ago.

The bad news is that the amount received is a 12.5% ($12,221,994)
less than the amount applied for. Since the average 1603
grant award is 97% of the amount requested, this shows that there
is a serious disagreement between Western Wind and
the Treasury about what costs can
be legitimately included in the application.
According to the company, the discrepancy was “apparently
due to changes in the administration of the program by the
Treasury Department which has reduced the suggested guidance on
the amount of any developer fee which can be included in the 30%
cash grant amount.”

Western Wind management believes that the whole grant
should have whole grant should have qualified, despite the
changed guidance, and plans to “engage in discussions” with
the Treasury in the hope of getting the original amount
reinstated.

Of course they would engage in such discussions (it only costs
them a little in legal fees, when compared to the eight-digit
potential gain,) but I think investors should write that $12M off
in their valuation of Western Wind. If it comes through, it
will be a nice upside surprise, but I’m sure the company was
already engaging in discussions with the Treasury while the grant
was being processed. Why should new
discussions achieve a different result?

What should this mean for the stock? I think we should look
back to the stock price in May, before the grant was delayed.
At that point, WNDEF was trading at about $1.50. The
company has 70.66 million shares outstanding (including the 8
million to be issued in the acquisition
of the Champlin/GEI wind pipeline, or about 78 million fully
diluted.) Based on the average grant-to-application for
1603 grants, the “expected” grant was 97% of the $90,556,707
applied for, or $87,840006, putting the shortfall at $9,505,293,
or $0.135 a share.

On the other hand, if Western Wind cannot recover the $9.5M, that
amount will be subject to 100% bonus depreciation, and
so can be used to reduce taxable earnings from the WindStar farm
this year. Assuming a (conservative) effective tax rate of
25%, 4 cents a share will effectively be recouped through bonus
depreciation. So if we totally write off the chance of
recovering any of the tax grant, the loss amounts to 9.5 cents a
share, and WNDEF should be trading around $1.40 based on prices in
May, before the grant was delayed.

This calculation ignores the fact that, even in May, Western Wind
was trading well below the value of its assets, which are worth
on
the order of $400 million, or between $5 and $6 a share.
Even if we ignore Western Wind’s pipeline, the value of the
company’s completed Windstar, Kingman I, and Mesa projects comes
to $230-240 million, or about $3/share, even after the
smaller-than expected tax grant.

That makes today’s sell-off to $1.23 / C$1.26 a share a little
confusing. The market does not like surprises, and may take
a some time to digest the actual numbers. I just bought a
little more of the stock, but this is intended as a short term
trade, since the purchase brought me above my target allocation.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 19, 2012

A New Competitive Landscape for Solar PV Racking

by Joseph McCabe, PE

I've been attending the Intersolar conference in San
Francisco for ten years since it was just Semicon, and noticed many
of the most interesting trends don’t show up in the
headlines. This year, I noticed that the exhibit halls
were packed with metal (racking) peddlers, far more than in previous
years.

Solar headlines concentrate on the modules, even though there seems
to be less and less differentiation in the module market, with
everyone competing for a lower and lower average selling price
(ASP). As a friend and PV industry expert told me, "Everyone is
trying to position themselves with a better product comparing how
their $0.78 per watt is better than the competitions $0.81 a watt".
This is a sign of the true commoditization of modules.

Module commoditization leaves companies looking elsewhere to
differentiate themselves; this year many companies are bringing new
racking. systems to the solar market There is still room to
play, and to be better at marketing structural solutions. Lighter
weights, higher wind loading, lower maintenance, and easier
installations are just a few of the ways metal peddlers are
positioning themselves. Lower balance of systems costs (BOS) are
being targeted by the Department of Energy (DOE) as worthy of
research and development funding within their Sunshot initiative.
Low cost structures should be something that can remain
made-in-the-US and not outsourced to overseas manufacturing.

The PV industry has become industrialized, with much more racking
and mounting hardware than in the past. You can see who is staking a
structural BOS claim in the industry. Racking, trackers, roof
attachments, stand offs and more vendors selling systems that look
like PowerGuard. PowerGuard was a product from PowerLight, now the
T5 by SunPower (SPWR),
that targets flat commercial roofs with a self ballasted aerodynamic
structure. The patents for PowerGuard must have expired, or the
lawsuit between SunPower and SunLink must have revealed weaknesses
in the original PowerLight IP such that others felt it time to get
into this market. SunPower is a vertically integrated company that
will not be drastically affected by this new competition in the
market for commercial roof structural solutions. Is this the
begining of healthy profits, then a fierce competition cycle similar
to which PV module manufacturers have been experiencing?

SnapNrack is a PowerGuard like product being displayed at Intersolar
for the first time. Watch not only for SnapNrack’s innovations, but
also their market share; these guys are the AEE wholesale distribution
people who know the ins and outs of the PV industry. SnapNrack sells
through Lowes, and a host of other electrical companies. Imagine the
sales force from the electrical industry now able to sell SnapNrack
structures. That is a nice bump in profit to the electrician trade
for the same job. Similar new products at Intersolar were KB
Racking’s Aerorack, and Panel Claw.

Many other PV structural attachment companies were at at Intersolar.
Quickmount, now at over 60 employees, sells an excellent stand-off
for sloped roofs. S5 sells brackets for holding PV on standing seam
roofing. A number of major PV module manufacturers have licensed the
Zep Solar products. Unirac, Unistrut, Renusol and S:Flex sell
metal systems designed for the PV industry. Dozens of other
companies are selling some kind of module attachment, ground screws
or tracking system. These structural only companies may have
difficulties competing in the mature vertically integrated PV
industry, or competing with the well established distributors who
have extensive industry experience.

While not metal, Solopower was showing off their flat commercial
roof system called Solosaddle.
There were many other rotationally molded plastic PV structure
products at the show which had better assure UV protection; solar
installations can be brutal on materials.

Norse Hydro (NHY.OL) had a large booth, but wasn’t showing specific
products. They sell aluminum, and a lot of it. Having already
established themselves with concentrating solar power companies,
they were at Intersolar getting attention of the project and module
manufacturers needing extruded aluminum. Even the Aluminum Extruders
Council had a booth at Intersolar.

My first day in San Francisco I ran into California Governor Jerry
Brown who said that California is aiming for 50 percent grid tied
renewables, particularly solar. This is typical political speak, but
sets up the tone for the expanding interest in these PV
technologies. As an example from the California utilities, the
Sacramento Municipal Utility District (SMUD) reportedly is expecting
to install between 500 and 800 MW of new PV in the next five years.
This on top of their existing 80 MW. With this kind of market pull,
many innovations will be reducing the cost to install PV, including
the ones mentioned here.

Disclosure: No positions.

Photos by author.

Joseph McCabe is a solar
industry
expert with over 20 years in the business. He is an American Solar
Energy Society Fellow, a Professional Engineer, and is
internationally
recognized as an expert in thin film PV, BIPV and
Photovoltaic/Thermal
solar industry activities. McCabe has a Masters Degree in Nuclear
and
Energy Engineering.

Joe is a Contributing Editor to
Alt
Energy Stocks and can be reached at energy [no space] ideas at
gmail
dotcom.

Intermolecular's Solar Strategy Rising During Industry Eclipse

Solar module prices have fallen 50% in the last six months.
This is great news for solar consumers, but has meant deep
pain for solar manufacturers. Just last week, GE Energy
(NYSE:GE)
laid
off workers and put
expansion plans at their Colorado factory on hold
for at least 18 months while they try to improve the Cadmium
Telluride (CdTe) thin film solar technology they plan to produce
there. That move followed the bankruptcy of another
thin film producer in Colorado, Abound Solar, by just a week.
And the list goes on.

With pressure on solar manufactures’ margins likely
to continue at least through 2013, now is too early to jump
in to solar stocks looking for a revival. But there may be
a way to play the turn around. The falling prices are
forcing all manufacturers to put more effort into improving their
manufacturing technology and module efficiency in order to get
back ahead of the rapidly declining cost curve. That’s
exactly why GE has delayed their plant construction, and rapid
technology improvement is part of the plan for virtually every
solar manufacturer hoping to survive the industry shakeout.

While it’s too early to buy solar stocks, it may be time to buy
into the business of helping solar firms improve their technology.

A month ago, First Solar (NASD:FSLR)
announced the first licensing agreement with Intermolecular,
Inc. (NASD:IMI)
by a solar company. That agreement allows First Solar to
use Inermolecular’s High Productivity Combinatorial (HPC) platform
to advance its manufacturing technology and the efficiency of its
solar cells. As I wrote
at the time, solar technology leader First Solar’s move
served as a large vote of confidence in the HPC
platform.

Today, Intermolecular announced an ongoing project with
King Abdullah University of Science and Technology (KAUST) in
Saudi Arabia for the enhancement of
copper-indium-gallium-diselenide (CIGS) thin film solar
manufacturing technology. While work with an academic
institution will serve as less of a vote of confidence for stock
market investors, the fact that IMI is working to improve both
CdTe and CIGS shows the flexibility of Intermolecular’s
technology. I would not be surprised if more licensing
agreements with both CdTe and CIGS manufacturers follow soon.

If more such deals are announced, IMI’s investors may have found
a truly rare opportunity: a profitable way to invest in solar
stocks while the prices of the industry’s products are plummeting.

Of course, plummeting solar prices open up a much easier way to
profitably invest in solar: install a system on your roof.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 18, 2012

A Note to Email Subscribers

On Monday, it came to my attention that AltEnergyStocks.com's email
list was not functioning properly, and and our morning emails had
not gone out for over a week. We have fixed the problem, email
subscribers received an email containing all the articles we'd
published since the the system stopped working. Since this may
have inundated many of our subscribers, I'd like to provide a quick
summary of each of the articles to help you pick and choose the ones
you'd like to go back and read:

For most, the answer is, “Not enough,” and that conclusion
has led to a growing interest in ecologically-oriented mutual
funds and ETFs.

It’s not cheap being green

Unfortunately, the desire to do right for the environment has
often been at odds with the need to see decent returns on many
green investments. Ecologically minded and socially
responsible mutual funds, like the Calvert Equity Portfolio (CSIEX),
Portfolio 21 (PORTX) or the
Gabelli Green Growth Fund (SRIGX)
often charge relatively high management fees (1.2%,
1.45%, and 2%, respectively.) Many investors may think these
fees are worth it, since the returns of such funds have typically
beaten the market over long (5 and 10 year) periods, despite the
fees and more recent (three years or less) underperformance,
especially considering the fact that most of these management fees
were considerably higher in the early years when the funds were
small.

Market research generally shows that ecological and socially responsible investing provides a
long-term edge, which most assume is because the more ecologically
and socially responsible companies operate with an awareness
of environmental and social risks which can harm the
bottom line.

The ETF option

If ecologically and socially responsible investing produces
superior returns, only to have these returns eaten up by
mutual fund fees, it makes sense to ask if the performance can be
replicated in a cheaper ETF option. Unfortunately, the only
socially responsible ETFs which have been around longer than three
years, the iShares
KLD Select Social Index Fund (NYSE:KLD) and
the iShares KLD 400 Social Index Fund (NYSE:DSI) have
underperformed the S&P 500 and two of the three mutual funds
mentioned above over the last five years. The two ETFs don’t
yet have ten year track records.

The lower five year performance of KLD and DSI occurred despite
substantially lower expense ratios, at 0.50% for both, which
should give them an edge over the mutual funds of between 3.5% and
7.7% over five years.

Is active management
required?

Although the data is too sparse to reach a conclusion, the weaker
performance of socially responsible ETFs may be a sign that in
order to retain an edge in terms of returns, ecologically and
socially responsible investing requires more active judgement than
can be had in a passively managed index fund like KLD or DSI.
This makes a certain amount of sense, because judging a
company’s sustainability is still far more of an art than a
science.

An actively managed ecological ETF

Investors who want the relatively low fees of an ETF, along with
ecologically and socially conscious active management now have an
investment option. In June, Huntington Asset
Advisors launched the actively-managed Huntington EcoLogical
Strategy ETF (NYSE:HECO.) Fund expenses are capped at
0.95% and will fall if the fund
is successful attracting assets.

As a recently launched fund, HECO does not have data on past
performance, but I recently spoke to HECO’s lead manager, Brian
Salerno CFA about HECO and his strategy, and also attained some
past performance data. Salerno is also an investment
advisor, and has been managing portfolios using the same
“Ecological” strategy he is using for HECO since 2008, based on
Global Investment Performance Standards (GIPS®). GIPS is
not exactly comparable to the total return methodology used to
create the past performance data of the mutual funds and ETFs,
because it accounts for fund inflows and outflows differently, but
for want of anything better, I compare his net-of
fees performance for the last three years with the other
funds I’ve mentioned in this article in the chart below:

Conclusion

As you can see from the chart, Salerno’s EcoLogical strategy
falls at the lower end of the middle of the pack over the three
years he’s been managing portfolios using it. Unfortunately,
the differences in performance measures and the short track record
mean that I can only conclude that the EcoLogical strategy’s
performance is in that “middle of the pack” range.

In short, it’s still too early to conclude if HECO’s active
management will allow investors to capture the return advantage of
ecological and socially responsible investing without it being all
eaten up in high mutual fund fees. In order to help you
decide for yourself, I’ll take a deeper look into Salerno’s
strategy in future articles.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 17, 2012

EVs, Batteries and Tales From The Valley of Death

John Petersen

Today is the fourth anniversary of my blog on investing in the
energy storage and electric vehicle sectors. Over the last four
years I've penned 275
Articles and 45
Instablogs on topics ranging from technical minutiae to broad
macroeconomic trends. Since most of my work focuses on challenges
and risks instead of lofty and optimistic goals, I'm often derided
as a curmudgeon who doesn't understand the dream. Truth is I've been
a guide in the Valley of Death for over thirty years and while I
love panoramic scenery, I can't overlook the dangers of old mine
shafts, cactus patches and the poisonous critters that live in the
valley. So I while occasionally gaze in awe at the majesty of the
landscape, my big concern is always the next step.

The scary part is knowing that companies I praise rarely live up to
my lofty expectations but companies I criticize always perform worse
than I think they will.

Most companies that enter the Valley of Death don't emerge. For the
fortunate few that do, the difficult times usually last longer than
anyone expected. The single character trait all entrepreneurs share
is unbridled optimism. The three character traits all survivors
share are determination, focus and fiscal restraint. The following
graph from Osawa
and Miyazaki is a stylized view of the cumulative losses
companies suffer as they transit the Valley of Death.

The next graph from the Gartner
Group is a stylized view of the Hype Cycle, a well-known but
frequently misunderstood market phenomenon that gives rise to
extreme overvaluation during a company's early stages that’s
frequently followed by a period of extreme undervaluation in later
stages when the major development and commercialization risks have
been overcome, cash flows are about to turn positive and
stockholders have grown so weary of waiting for good news that
they're willing to sell at distressed prices despite improving
business fundamentals.

The graphs are not perfect overlays on a horizontal time scale, but
they're close, and that's where the dangers lurk. The reason for the
differences between the two graphs is a curious split personality of
investment markets that was first described by Benjamin Graham who
observed, "in the short term, the stock market behaves like a voting
machine, but in the long term it acts like a weighing machine."
Stock prices always peak in early stages of a product launch because
the dream is so beautiful. At the Peak of Inflated Expectations, the
voting machine personality is firmly in control. When the day-to-day
difficulties of building a successful and sustainable business
become obvious prices begin an inexorable slide into the Trough of
Disillusionment. As they reach the bottom of the trough, the
weighing machine personality assumes control.

In combination, these graphs are the reason for Warren Buffet's oft
quoted wisdom that "Investors should remember that excitement and
expenses are their enemies, and if they insist on trying to time
their participation in equities, they should try to be fearful when
others are greedy and greedy when others are fearful."

That's why truly successful investors who understand the Valley of
Death usually follow one of two strategies:

Venture capitalists buy during the Innovation Trigger and plan
on selling during the Peak of Inflated Expectations.

Vulture capitalists buy during the Trough of Disillusionment
and plan on holding for the long term.

Everybody else is betting on the greater fool theory of investing
which holds that no matter the price paid by a fool, there will
always be greater fool who's willing to pay an even higher price.
The lucky ones can make a few bucks but those who press their luck
frequently learn the identity of the greatest fool of all.

As I confessed above my record at predicting short-term success is
spotty at best and many companies that I've praised over the last
four years have been mired in muddle through survival mode for
longer than I would have thought possible. With the sole exception
of C&D Technologies, however, they've all survived and they
continue to make solid business progress. Companies in the survivor
group include Active Power (ACPW),
Exide Technologies (XIDE),
Maxwell Technologies (MXWL),
ZBB Energy (ZBB)
and my old teammates at Axion Power International (AXPW.OB).
These companies have all had their ups and downs, but they've
avoided catastrophic errors and grown their businesses through
determination, focus and fiscal restraint. I continue to believe
that all five will emerge from the Valley of Death as formidable
competitors in their respective sub-sectors and provide
market-beating returns for patient investors.

Turning to the other side of the ledger, my track record has been
flawless when it comes to identifying companies that were riding the
Hype Cycle but unlikely to survive the Valley of Death. Beacon
Power, Ener1 and most recently Valence Technologies (VLNCQ.PK)
were complete and utter failures that ended up in Chapter 11. Altair
Nanotechnologies (ALTI)
avoided a total loss by selling control to a Chinese company after
its stockholders lost 90% of their value. A123 Systems (AONE)
is on the deathwatch and seems unlikely to survive the year after
watching its market capitalization shrivel from $2.3 billion in
December 2009 to $123 million at yesterday's close. The one trait
they all shared was an errant belief that the glory days would last
forever and that bullish press releases could obviate the need for
determination, focus and fiscal restraint.

Over the last several months I've become increasingly vocal about
the risks Tesla Motors (TSLA)
faces as it launches its first credible consumer product and begins
a long and arduous trek through the Valley of Death. Adherents and
advocates are certain that I don't understand the dream. Truth is I
understand the dream perfectly but I know that no company can
overfly the Valley of Death on the wings of a dragon. The only way
through the valley is on foot in sweltering heat.

At March 31st Tesla had $123 million in working capital and $154
million in stockholders equity. Unless it slashed spending during
the second quarter, its June 30 financial statements should show
working capital and stockholders equity of roughly $65 and $85
million, respectively. At yesterday's close, Tesla's market
capitalization was an eye-watering 45 times its estimated net worth, or
about ten times higher than it should be at this stage in the
company's development.

Tesla is entering the most cash intensive period in its business
history where it will have to make cars instead of talking
about them. Unless management acts quickly, Tesla will run out of
cash this quarter. I was surprised that Tesla didn't close a
substantial capital raise during the second quarter because its
financial statements were looking so weak at the end of March. Now
that we're two weeks into July with nary a peep about additional
fund raising, I have to believe Tesla is facing difficult market
conditions and significant investor skepticism over immediate
execution risks that can't be overcome with happy talk. The
potential investors have the upper hand in this particular waiting
game because they know that Tesla is trapped between the rock of a
down-round financing and the hard place of a going concern
qualification on the Form 10-Q it has to file by August 9th.

The clock is ticking.

As a long-term guide in the Valley of Death I've been in that
position before and know how the game is played. This is not an
opportune time for retail stockholders who aren't paying attention
to the carrion birds circling overhead.

Disclosure: Author is a
former director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.

Capstone Turbine Ramps Revenue, Earnings Not So Much

by Debra Fiakas CFACapstone Turbine
Corporation (CPST:
Nasdaq) made it to the Efficiency Group of our Mothers
of Invention Index because of its line of low-emissions
micro-turbines. The company has sold 6,500 of them around the
world. The fruits of this building installed base are evident
in Capstone’s top-line, which has increased in each of the last
three years and reached $109.7 million in the fiscal year ending
March 2012. The bottom-line has followed in the same
direction, but is still in the red. In the last fiscal year,
Capstone recorded an $18.8 million loss.

The $18.8 million loss included a $14.0 million benefit from the
change in fair value of warrants Capstone issued in the course of
capital raises over the last five years. Accounting treatment
of warrant liabilities is a non-cash item, whether a benefit
associated with the write-down of the liability or a charge
resulting from a write-up of the liability. This means the net
loss was closer to $32.8 million. In the previous two years
Capstone recorded loss associated with outstanding warrants.

All that marking up and marking down of some illusory warrant
liability makes Capstone’s bottom line a bit noisy, not to mention
useless. That is why cash flow from operations is such a
valuable measuring stick for companies like Capstone. In the
last fiscal year Capstone used $21.4 million in cash resources to
support operations. The company used a total of $21.9 million
in fiscal year 2011 and used $36.6 million in fiscal year 2010.

The take-away from this little stroll through Capstone’s cash flow
from operations is this: the company’s operations are simply
not producing the results one might expect for a company with
significant installed base. Investors long in CPST will
probably roll their eyes on this statement.

The bull case points to Capstone’s large addressable market and the
great promise in the oil and gas industry and manufacturing.
Capstone can point to a variety of applications for its product from
powering oil and gas field equipment or providing economical power
in remote locations. Then there is the flexibility of its
technology in accepting a variety of fuels from waste gases, to
propane, to wet flash gas at gas well heads.

Frankly, I am also impressed with Capstone’s product line.
However, I am disappointed in management’s performance in conserving
the company’s ample cash reserves. Captstone has dipped into
the capital market well several times with what has turned out to be
dilutive equity offerings. Total shares outstanding have
increased 72% over the last three years. There are 26.5
million warrants waiting in the wings for exercise that could bloat
shares outstanding by another 9%.

Dilution can be tolerated if at the end of the day there is more
value to spread around. Unfortunately, there is just something
about a big bank account that brings the spendthrift out in a
management team. Even if that accusation cannot be made
against Capstone’s management them, I would like to see the company
undertake a cost-cutting program of some kind and more value falling
to shareholders. Even the Capstone bulls could not disagree
with that.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein. CPST is included in
Crystal Equity Research’s The Mothers of Invention Index.

July 16, 2012

Are IPOs good for early-stage companies and advanced biofuels?

$104 million Elevance private financing round larger than
last two IPOs; puts IPOs in focus; do the benefits outweigh the
costs?

Do advanced biofuels companies really need to be “thinking IPO”,
industry leaders were asking this week after Elevance Renewable
Sciences announced that it has raised $104 million in its Series E
financing round.

Lacustrine Limited via Genting Genomics Limited, wholly owned by
Genting Berhad, based in Kuala Lumpur, Malaysia led the round with
Total Energy Ventures International, based in Paris, France also
participating in the financing. Elevance also announced that
Tan Sri Lim Kok Thay, Chairman and Chief Executive of Genting
Berhad, will join the Elevance board of directors.

Elevance produces high performance ingredients for use in personal
care products, detergents, lubricants and other specialty chemicals
and fuel markets from renewable feedstocks.

Reaction from Elevance

“The investment will support Elevance’s strategic growth plans,
including the continued development of biorefineries in Asia and
North and South America,” said K’Lynne Johnson, CEO of Elevance.
“The addition of the Genting Group via Lacustrine Limited,
compliments the strengths of our existing investors and further
emphasizes the key potential that Malaysia and Asia play in our
global footprint.”

Are early IPOs necessary?

The Yes view.

In addition to the IPO event itself, IPOs enable companies to tap
the broad and liquid public finance channel for follow-on equity
raises that enable construction of first- and second-commercial
plants- and allow the company to tap the bond market at sharply
reduced rates compared to the rates enjoyed by private companies.

Recent public raises

Earlier this month, Gevo (GEVO)
announced
that it has agreed to sell 12.5M shares of its common stock at
$4.95 per share. The gross proceeds to the Company from this
offering are expected to be $61.87M. The Company also announced the
pricing of its public offering of $40M aggregate principal amount of
7.5% convertible senior notes due 2022.

Last week, Pacific Ethanol (PEIX)
announced
it has closed its previously announced underwritten public
offering of 28.0 million units at a public offering price of $0.43
per unit, for gross offering proceeds of $12.0 million. The warrants
are exercisable immediately.

In February, Amyris(AMRS)
completed
a $58.7 million private placement of its common stock and placed
$25 million in 3% senior unsecured notes due in 2017. The purchase
and sale price for the shares was $5.78 per share.

The No view.

Industrial biotechnology companies should not be in the IPO markets
until they have completed their first commercial plants; the value
of their technology can be fairly assessed in dollar terms, and the
company is generating meaningful revenues and is on a firm path to
profitability.

In addition, premature IPOs cause confidence losses for the
companies and the sector as a whole when shares do not hold up well
in the secondary market – and industrial biotech stocks have taken a
drubbing there. Early IPOs cause companies to “go quiet” and lose
visibility in their run-up to IPOs – visibility that is critical to
their capital and human capital aggregation. Finally, private
placements and venture rounds still offer, for those companies that
can access strategic investors, attractive pools of capital that, in
many cases, exceed those pools raised in IPOs.

Recent private raises

In April,
Sapphire Energy announced that it has secured the final
tranche of a $144 million Series C investment funding. The Series C
backers include Arrowpoint Partners, Monsanto, and other undisclosed
investors. All major Series B investors have participated.

Last month, Myriant announced that it closed a $25 million private
bond placement for the construction of its flagship commercial
bio-succinic acid plant located in Lake Providence, Louisiana.

In May, EdeniQ
announced it has raised over $30 million in additional capital
in the form of both an equity investment and a debt facility. The
equity investment was led by both existing investors, including
Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, Cyrus
Capital, The Westly Group, Angeleno Group, I2BF Global Ventures and
Element Partners as well as a new investor, Flint Hills Resources
Renewables LLC.

In March, Virdia
announced $30 million in its latest round of financing,
raising over $20 million from insiders, Khosla Ventures, Burrill
& Company and Tamar Ventures. In addition, the company closed a
$10 million in a venture debt deal with Triple Point Capital.

In February, BioAmber
raised $30 million in its Series C round of financing with $20
million invested in November by Naxos Capital, Sofinnova Partners,
Mitsui & Co. Ltd. and the Cliffton Group, and a second tranche
of $10 million on February 6th, 2012 closed with specialty chemicals
company LANXESS.

In January, LanzaTech
announced that it has closed its Series C round with new
investment totaling US $55.8 million led by the Malaysian Life
Sciences Capital Fund. New investors include the venture arm of
Petronas, the national oil company of Malaysia, and Dialog Group, a
Malaysian technical services provider to the oil, gas and
petrochemical industry.

In January, BASF
announced plans to invest $30 million in the US technology
firm Renmatix, as part of a new $50 million Series C investment
round announced by Renmatix.

Abandoned IPOs

Still in the IPO queue

The Malaysian wave

The Malaysian surge in biofuels is becoming more and more apparent.

The Elevance financing featured the entrance of Lacustrine Limited
into the field, a wholly owned subsidiary of Genting Berhad, the
holding company of the Genting Group. Genting is one of the largest
multinationals, and invested in leisure & hospitality, power
generation, oil palm plantations, property development,
biotechnology and oil & gas business activities.

Earlier this year, there was the investment in LanzaTech in January
by Petronas, the Malaysian state oil company; also in January, an
announcement of a
joint venture between Japan’s Toyo Engineering Co, Glycos
Biotechnologies and Malaysian developer Bio-XCell to build a 10,000
ton per year ethanol plant in Johor Baru by Q2 2013.

Plus, the announcement
last month that Gevo signed a collaborative agreement with the
intent to site a cellulosic biomass isobutanol facility in Southeast
Asia, with the Malaysian government’s East Coast Economic Region
Development Council (ECERDC), Malaysian Biotechnology Corp
(BiotechCorp) and the State Government of Terengganu.

July 15, 2012

Natural Gas Liquids are Following Natural Gas Off a Fracking Cliff

Tom Konrad CFA

The unprecedented boom in natural gas supplies over the last few
years as been one of the few tail-winds for the US economy over the
last few years, as plummeting natural gas prices have lowered costs
for both industry and consumers. Few outside the natural gas
industry even understood the shear scale of the shale gas resource,
although industry insiders did.

The Shale Gas Glut

In 2008, I recall a natural gas executive complaining about how
he could not get policymakers to understand the sheer scale of the
shale gas resource. To be honest, I did not take his
comments seriously, either. That was a mistake. Shale
gas has transformed our economy in many ways, and changed the
economics of competing fuels, from coal and nuclear to renewables
like solar, wind, and geothermal. Cheap natural gas is even
doing what Pickens failed to do: get
a major oil company to invest in natural gas filling stations.

While shale gas transformed our economy, it also transformed the
stock market, which is why I should have paid more attention.
Low natural gas prices have not only hurt renewable energy
stocks, they have also helped chemical and fertilizer companies
that use natural gas as a feedstock. I first
came across LSB Industries (NYSE:LXU),
a geothermal heat pump (GHP) and chemical company that uses a lot
of natural gas a couple month’s after I heard the natural gas
executive’s rant. I bought both LXU and its pure-play GHP
rival Waterfurnace (TSX:WFI,OTC:WFIFF)
at the time, but I sold LXU a few months later, congratulating
myself on a quick double at $16, while holding Waterfurnace.
Waterfurnace is down a little since I bought it (although it
has been paying a nice dividend along the way, while LSB doubled
again, in large part because of the tail winds from low natural
gas prices.

I don’t plan to make the same mistake again, so I pay more
attention to what’s going on with fossil fuels. To that end,
I attended the 2012 Symposium
on Oil Supply and Demand: Studying the Wildcards, where
industry experts tried to predict the next fossil fuel “surprise”
that should not be a surprise, if we’d only been paying attention.
(The presentations and video proceedings are available at oilwildcards.com.)

NGLs: The Next Shale Gas?

If there is going to be another fossil fuel glut to follow
natural gas, it will probably be Natural Gas Liquids (NGLs, not
to be confused with Liquefied Natural Gas, or LNG).
Natural gas liquids are the slightly larger carbon compounds
such as ethane, pentane, and propane, which are co-produced with
natural gas, but are usually counted with oil production in
industry statistics. But, as I learned at the symposium,
NGLs should not really be counted with oil or gas, or
even separately. Each NGL has its own uses, and its own
market, and they need to be considered separately if we are to
understand the price dynamics.

Perhaps most importantly for those of us worried about the
ability of oil production to keep up with demand, NGLs are not
used as transportation fuel (with a tiny exception for propane in
forklifts and the like.) Hence, even though NGLs are often
counted as part of the oil supply, they do not ease the
constraints on the supply of gas or diesel.

The reason NGLs are interesting now is because recent low natural
gas prices have led natural gas producers to dramatically shift
drilling away from “lean” prospects (which produce natural gas but
few NGLs) to “rich” ones (which produce significant NGLs along
with the natural gas.) This trend was highlighted at the
Symposium by Adam Bedard, Senior Director at BENTEK Energy, an energy
markets analytics company (see graph above). So
far, relatively high prices for NGLs have kept many wet gas wells
profitable despite low gas prices. In a sense, gas companies
are drilling for NGLs, and producing natural gas a a byproduct.

The problem is that the rapid shift towards NGL-rich plays is
liable to produce more NGLs than the market can handle.
According to George Little, a partner at Groppe, Long &
Littell, an oil and gas analysis
and forecast provider speaking at the Symposium, the
leading indicators of periods of NGL oversupply are the relative
prices of olefins ethylene and propylene, which are made from
NGLs.

When propylene prices are above ethylene prices, it is a leading
indicator for ethane being sold for its heat value into the
natural gas market, rather than being sold into the chemicals
market. That indicator, according to Little, is
currently “flashing red” (see graph above.) The problem with
selling ethane into the natural gas markets is that, with current
low natural gas prices, it will only fetch $0.10 to $0.16 per
gallon, a fraction of the current price.

Competition with natural gas for industrial uses and heating has
also been eroding the propane market. The butane market is
similarly stagnant.

Stocks to Avoid

With stagnant demand in most NGL markets, it’s no surprise that
new supply has been dramatically reducing NGL prices. The
coming flood of new supply will only push NGL prices down further.
Natural gas producers that are counting on high NGL prices
to maintain profitability are likely to find it as hard to
profit from NGLs over the next few years as it recently has been
to make a profit from natural gas.

Which natural gas producers are most reliant on NGLs, and hence
vulnerable to a price collapse? Devon Energy (NYSE: DVN), recently
announced a sixth consecutive quarter of increasing NGL
production and an 80% year over year increase in NGLs from the
Cana Woodford shale. On the other hand, Chesapeake Energy
(NYSE:CHK) may be less vulnerable, since that company recently
trimmed its projections for NGL production.

On the green side of the coin, biochemical companies which have
turned to these higher-margin businesses in order to escape
commodity squeezes in biofuels may see the same story repeating
itself in chemicals. Investors should not count on
high-margin biochemicals to remain high-margin if they replace
petrochemicals made from NGLs.

Likely Winners

On the other hand, midstream NGL companies should be able to
produce increasing profits from NGL bottlenecks. Pipeline
operator ONEOK Partners (NYSE:OKS) and Enterprise Products
Partners (NYSE:EPD) have both been seeing increasing margins from
their NGL operations. Those trends are likely to continue as
the growing NGL glut increases demand for NGL transportation and
processing infrastructure.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 14, 2012

Rentech Retrenches

by Debra Fiakas CFA

Clean energy solution provider Rentech, Inc. (RTK:
NYSE) is scheduled to report second quarter 2012 results the
first week in August. Usually the seasonally strong period,
this year the June quarter has shareholders sweating. That
is because the warm weather conditions sent farmers out into
fields earlier than usual to prepare fields. Orders for
fertilizer products from Rentech’s East Dubuque, Iowa
facility were coming even before the end of the March
quarter. The net effect was to pull sales forward. The
question now is whether June will now present a weak quarter.

Even though Rentech has positioned itself as a leading edge,
renewable energy company, its principal product and primary
revenue source is decidedly conventional. The East Dubuque
facility produces a variety of fertilizers such as ammonia, liquid
and granular urea and nitric acid from natural gas. Sales of
fertilizer products account for 99.7% of total sales.

Profits from the fertilizer business help support Rentech’s
alternative energy projects. Rentech developed technologies
for the gasification of biomass. The company has a
demonstration plant in Commerce City, Colorado. Rentech claims it
is the largest synthetic transportation fuel plant in the U.S.
capable of producing up to 10 barrels of fuel per day.
Rentech has integrated three different processes: steam
methane reforming, Rentech’s own biomass gasification and
Fischer-Tropsch technologies.

To be fair, Rentech does realize revenue in the alternative
energy segment. However, it is mostly from consulting work,
licensing or occasional sales of fuel produced in the
demonstration unit.

Waterfurnace 7 Series vs. Climatemaster Trilogy Geothermal Heat Pumps: The Best of the Best

Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF)
launched its new highly efficient 7
Series geothermal heat pumps (GHP) today.
The 7 Series commercial release beats Climatemaster’s
(a division of LSB
Industries (NYSE:LXU))
Trilogy 40 as the first commercially available GHP with a variable
speed compressor. The Trilogy 40 is currently available as
part of a pilot program, and is expected to be commercially
available later this year. The variable speed compressor
enables a significant jump in efficiency over previous two-stage
compressors.

I looked at the technology behind these new heat pumps in the
article Geothermal
Heat Pumps: The Next Generation in May, soon after
Climatemaster introduced the Trilogy. At the time, we only
knew that Waterfurnace expected the 7 Series to be “more
efficient” than the Trilogy. Now we have detailed specs, I
thought I’d compare them head-to-head:

As you can see from the chart above, Waterfurnace managed to
nudge out Climatemaster in both cooling (EER) and heating (COP)
efficiency ratings. Both are on linear scales, so the Series
7 is 2.5% more efficient at cooling and 6% more efficient for
heating than the Trilogy. With top efficiency ratings, the
Waterfurnace GHP will likely appeal to customers who must have
“the best” of everything.

Other Factors

The efficiency of the GHP unit is only one factor in
overall system efficiency, and efficiency is only one factor in
the decision of what to install. Price will be an important
factor as well, although given the likelihood that these
variable speed GHPs will be priced at a significant premium, price
sensitive customers will most likely install two-stage GHPs.
Waterfurnace’s Series 5 was launched in March, at
a slightly lower price than the previous Envison product it
replaced, while maintaining all the features and efficiency of
that model.

The most important factor for installers will be dealer support
and ease of install, especially for
the residential market. Both Climatemaster and
Waterfurnace seem to have simplified installation with the new
models, while dealer support is much more a local issue, and is
determined by the installer’s relationship with their distributor.

Along with the Series 7, Waterfurnace
is introducing a new “IntelliZone2″ zone
controller, which will simplify the installation and use of their
Series 5 and 7 products with multiple zones. On the other
hand, Climatemaster’s Trilogy includes a propriatary “Q-mode”
which allows the heat pump to create hot water year round.
Most rival heat pumps only create hot water when being used
to heat or cool the building. In new residential
applications without an existing water heater, Q-mode could easily
give Trilogy the edge over the 7 Series, since it would
allow the contractor to dispense with a secondary hot water
source.

Conclusion

Neither of these two GHPs is the clear winner, with the 7 Series’
edge in efficiency countered by the year-round hot water of the
Trilogy’s Q-Mode. Waterfurnace’s efficiency edge is more
significant in heating-dominated climates, such as the Northern US
and Canada, while Climatemaster’s Q-Mode will probably give the
Trilogy an edge in new-build markets. Existing relationships
between installers and their dritributers will probably dominate
both in many cases. UPDATE: The Series 7′s earlier
commercial availability will make
Waterfurnace’s offering the only real choice for
installations over the next few months.

The biggest winners will be consumers, who now have both cheaper
versions of two-stage GHP technology available, as well as the
option to enter a whole new frontier of HVAC energy efficiency.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 12, 2012

Musings From The EV Black Knight

John Petersen

In June an anonymous blogger at Clean Technica dubbed me the “EV
Black Knight,” the mortal enemy of electric cars. While
I was flattered by the tribute, I was deeply offended by the
suggestion that I might be foolish enough to impale a lithium-ion
battery pack with the burnished broadsword of economics.

Seriously, anybody who’s spent any time studying battery safety
knows that shockingly bad things can happen when you puncture a
lithium-ion battery pack with a conductor and even a full metal
jacket wouldn’t be enough to protect a knight errant from the kind
of explosive thermal runaway that did about $5
million of damage to a GM battery testing laboratory that was
designed to safely manage catastrophic battery failures.

Truth is I’d
rather have an e-bike than a horse, I find pens mightier than
swords and I think green eyeshades enhance vision while face visors
lead to the kind of tunnel vision I find so appalling in ideologues
and Tesla (TSLA)
stockholders who apparently think we can waste massive quantities of
metal for the dubious luxury of powering a car with coal
instead of gasoline.

I think the basic problem is that we’re painfully aware of energy
costs but blissfully ignorant of the cost of making the machines
that either produce or consume energy.

In the case of the family car, we know it burns 400 gallons of gas a
year and hate the fact that each gallon costs $3 to $4. Heck, over a
15-year useful life we’ll spend $18,000 to $24,000 on fuel alone.
Spending as much for fuel as you spend to buy the car seems
outrageous until you consider that the cost of fuel includes the
cost of:

Manufacturing the machines that drill for and produce crude
oil;

Manufacturing the machines that that transport crude oil for
refining;

Manufacturing the machines that convert crude oil into fuel;
and

Manufacturing the machines that transport fuel to market.

I’ve never seen a detailed analysis, but I’d give long odds that if
you start with the purchase price of the family car and add a
proportional share of the cost of the upstream machinery, equipment
and processing facilities that keep it running, you’ll find that
machinery represents at least three-quarters of total ownership
costs.

While I can’t pin down a precise number, most reports that discuss
the economics of wind power claim an all-in power production cost of
$.05 per kWh. In the typical analysis 25% of total power production
cost is attributable to operations. The remaining 75% is
attributable to capital cost recovery – the cost of manufacturing
the turbines that turn free energy into useful energy.

With the exception of simple devices that burn fuel directly for
heating and cooking, the cost of every useful form of energy pales
in comparison to the cost of the machines that use the energy and
the cost of the upstream machinery, equipment and processing
facilities that deliver energy to our machines in a useful form.

If you spend enough time thinking about the supply chain, the issues
become obvious.

We don’t have an energy cost and supply problem.

We have a machinery cost and supply problem.

Energy from wind, sun and water may be free, but machines to make
that energy useful are anything but free. The same is true for coal,
oil, natural gas and uranium. The in-place energy resources cost
nothing, but the machines that extract, transport, refine and use
those resources are expensive indeed.

Last year we produced 1,996 kg of energy resources for every man,
woman and child on the planet. We also produced 214 kg of iron and
steel per capita and 19 kg of nonferrous metals.

While energy resources are single use commodities, ferrous and
nonferrous metals are essential for the manufacturing of:

EP – machines that produce energy and convert it to useful
form;

EU – machines that use energy to perform useful work; and

NM – non-mechanical essentials of modern life including
buildings, power distribution grids and an infinite variety of
durable and disposable consumer and industrial goods.

The essential conundrum of modern life is that EP + EU + NM can
never exceed total metal production. If we increase metal
consumption in one category we have to reduce it somewhere else
unless one believes in natural resource fairies.

According to a recent McKinsey study, “Resource
Revolution: Meeting the world’s energy, materials, food, and water
needs,” the planet supports 1.8 billion middle class
consumers. Over the next 20 years that number will increase to 4.8
billion, a gain of almost 270%. Every one of them will demand energy
produced by machines, energy using machines and the non-mechanical
essentials of modern life. The problem, of course, is there simply
won’t be enough raw materials to go around.

Something’s got to give!

Simply stated, the great challenge of our species will be overcoming
persistent global shortages of water, food, energy, building
materials and every commodity you can imagine.

The McKinsey report argues that available resource productivity
improvements could:

Offset 100% of the expected increase in land demand;

Address more than 80 percent of expected growth in energy
demand;

Offset 60 percent of anticipated growth in water demand; and

Address 25 percent of expected growth in steel demand.

Unfortunately the report is completely silent on more troublesome
resources like nonferrous metals that are absolutely essential for:

EP;

EU; and

NM.

Whether we like it or not, supply chain shortfalls will have to be
overcome by wasting nothing, recycling everything and making the
most efficient possible use of every natural resource.

That doesn’t leave much room for idealists that want to use
non-recyclable 1,000-pound battery packs so they can choose coal
instead of gasoline to power their car.

In the battery industry the strain on metal supply chains will be
immense. The problems won’t be overwhelming for metals like lithium
and lead that are abundant in nature but require major new
investments in mines and infrastructure, but they’ll be crippling
for metals like copper, nickel, cobalt, vanadium and rare earths,
which are already in short supply and likely to encounter even more
daunting supply chain disruptions over the next two decades.

I’d certainly never waste hundreds of pounds of steel to protect
myself from starry-eyed fools in motley who didn’t endure the cruel
tutelage of Sister Mary Angelica in their formative years.

This article was first published in the Summer 2012 issue of
Batteries
International Magazine and I'd like to thank editor Mike Halls
and cartoonist Jan Darasz for their contributions.

Disclosure: I have no
direct or indirect interest in Tesla and I have nothing to gain or
lose from its stock price movements. While I am a former director
and current stockholder of Axion Power International (AXPW.OB),
a nano-cap company that has developed a robust and affordable
lead-carbon battery for use in micro-hybrid, railroad and stationary
applications, I can't see how the success or failure of a fairy tale
product like the Tesla Model S could impact the value of my
investment in a company that's focused on relevant mainstream
markets.

July 11, 2012

Mud/salt formations on the
Badwater, Death Valley plain. Image by Daniel
Mayer.

What makes a winner in advanced biofuels? Five companies –
Abengoa (ABGOY),
INEOS Bio, Mascoma, Gevo (GEVO),
and American Process reflect on the essential ingredients for
success.

“We are industrial technology
businesses, making a commodity, we have to control costs
everywhere and learn, learn, learn.” – American Process CEO
Theodora Retsina

You could call it VODville, VOD for valley of death that is – a
stretch of hard desert that every project and developer must cross,
and, according to conventional wisdom, in the biggest hurry
possible.

There are ox skulls along the side of the road to remind you of what
happens to those who linger too long, and the bright lights of some
Las Vegas ahead to tempt you ever forward, like the kleig lights
attending a Hollywood opening.

But is racing across the desert in the fastest possible manner
always the best policy? Are there reasons to stage it as a slow,
methodical journey, despite the hardships and the boardroom
heartache? And, if so, what makes a journey of that nature work.

In Washington this week, the US Department of Energy’s Biomass
Program, has gathered together the companies developing advanced
biofuels projects in partnership with DOE, and yesterday five
companies took the stage to reflect on lessons learned from the
pioneering journeys in building demonstration and first commercial
advanced biofuels projects.

Christopher Standlee, Executive Vice President, Abengoa
Bioenergy

“Cellulosic ethanol for us at Abengoa (ABGOY)
– it;’s been a long journey with the DOE, starting back with a pilot
that we built in Nebraska, using wheat straw as a feedstock, back in
2007. Then, we built our demonstration plant in Salamanca, Spain in
2009 and started construction on our first commercial scale plant in
Hugoton, Kansas, in September 2011. We’ll be operational at the end
of 2013.

“In first generation, there were challenges – in technology,
financing and it took a long time to persuade lenders to take risks.
In 2nd generation ethanol, project financing is an even greater
challenge. Aside from the technology risk, there’s the feedstock
risk, and the offtake risk – especially because in this commodity
market, there aren’t 20-year power purchase agreements and pricing
visibility can be, by lending standards, very short term.

“And then there are the RIN values, which are somewhat unproven as
yet in the cellulosic area.

“So, it took time to assemble the $133 million loan that we needed
for the project. And it’s a loan, its going to be paid back, its
backed by the full faith and credit of Abengoa and our company has
never failed to repay a loan since it was founded many years ago.

“for us, the primary driver has been the Renewable Fuel Standard,”
adding that none of Abengoa’s efforts would have been made without
the long-term stability that RFS2 brought, to ensure that there
would be a market for the fuel.

“The economic impacts are not insubstantial, even for a first
commercial facility. In addition to hundreds of construction jobs,
and 65 full time jobs after construction is completed, there is the
$17M in biomass that we will acquire from growers in a 50 mile
radius around the plant – and that feedstock never really had much
of a market before.”

Peter Williams, CEO, Ineos BIO

“The most important lesson learned? Team is the most important
factor. Team is every aspect of the operation, from design and
construction through to operation.

Williams added that the second most important factor was, in their
view, to have a technology that could take advantage of a diversity
of feedstock, and a diversity of geography, to ensure the widest
possible customer base for the commercialization and licensing
phase, after the first commercial plant was completed.

Bill Brady, CEO, Mascoma

Brady emphasized the importance of products that could drive revenue
for a company in the early stage, noting how Mascoma’s MGT yeast
technology had landed seven customers for the company among
traditional ethanol producers, in the years while it was developing
its technology and moving from its Rome, NY demonstration to its
first commercial plant in Kinross, Michigan, which is expected to be
operational in 2014.

“A major lesson learned? First of kind projects usually have a
second phase when design flaws a fixed. So, its been important for
us to recognize and learn that our journey ought to be completed in
two phases. A first phase, where we take out as much risk as we can
and save as much capital as we can, and run that project for 24
months, and then make improvements. Making design changes without
operating experience can result in real disappointment.

“For us, on the finance side, the power of clear market signals is
absolutely critical – signals like tax policies and RFS2.

“You see, in companies there are generally four types of projects
that could get funded, once you have shown that you can exceed the
company’s basic internal hurdle rate of return.

“There are the low risk, high return projects, which are really
rare. There are the projects which have low risk and low return,
generally business as usual expansions. Then there are the high
risk, high return investments, that generally represent new
technologies deployed in existing businesses. Then there are
projects like first of kind, advanced biofuels, which are high risk
and low return.

“To get projects funded in that kind of environment, you need all
the help that policies like RFS2 and tax policies can provide.”

“The most important thing, in our view, is when you find the product
that you can make and for which there is a market, you have to find
the most economic route of production. You have to understand what
the best of biology can give you, and what good chemical engineering
can do with that to realize it in the lowest cost way. Some projects
get too focused on the biology or the chemistry, and the opportunity
of the market, and they overlook the importance of engineering in
terms of delivering that lowest-cost product.”
Theodora Retsina, CEO, American Process
“For us, there are five important lessons learned. First, leverage
co production wherever you can, and don’t build anything you don’t
have to. Second, understand that there is real risk, and perceived
risk, and only operating a large demonstration that you keep as
simple as possible, will allow you to understand the risks.

“Third, there’s the execution risk, and we have found that it is
paramount to keep in-house control of basic engineering and
construction management.

“Fourth, a lack of stable policy has great impact. Fifth, in
financing, you have to look everywhere, conventional and
unconventional.

The Bottom Line

Theodora Retsina put it well, “We are industrial technology
businesses, making a commodity, we have to control costs everywhere
and learn, learn, learn.”

Shaking out the cost, and de-risking projects, is the abundantly
clear message. Whether it is in using bolt-on technologies that
leverage existing production, or developing in multiple phases to
learn as much as possible at the minimal engineering scale.

Team and experience – whether it is experience gained from multiple
stages of development, or the experience that the team brings from
projects in the past – was commonly cited.

And the group was clear on the transformational impact of clear,
long-term market signals such as the Renewable Fuel Standard –
paramount, in their view, to risk mitigation for lenders and project
developers.

Is there a market? What’s the best team? How to shake out the costs?
Those are the lessons from the grizzled pioneers, the veterans of
VODville.

Would-be crossers of the Valley could highly profit from their
experience.

July 10, 2012

How to Play the Solar Revival

Tom Konrad CFA

A new report from GTM research, “PV
Technology, Production and Cost Outlook: 2012-2016” predicts
continued contraction in PV manufacturing. While recent
price declines have driven record-breaking installations, it has
also driven most manufacturers’ margins into the red. You
can’t make up for negative margins on volume.

For a stock market investor, the best approach to a cut-throat
industry is to stay away until competition and lower prices remove
or absorb the excess capacity, and to buy the remaining players
just before the industry’s prospects revive.

As you can see from the chart above, the current price leaders
are First Solar (NASD:FSLR),
Renesola (NYSE:SOL),
Trina Solar (NASD:TSL),
Yingli Green Energy (NYSE:YGE),
and Jinko Solar (NYSE:JKS).
First Solar, Trina, and Yingli have an advantage over the
other two because their products are “Tier 1″ bankable, meaning
projects using their modules are easier (and cheaper) to finance.

The most important thing for an investor trying to get in on the
solar bottom to know is not the most efficient manufacturers
today, but the most efficient when the market begins to revive,
and when solar manufacturers will return
to profitability. The report puts the year the leading
solar manufacturers will return to positive margins at 2014.
If they are right, the best time to buy these stocks will
probably come in late 2013 or during 2014.

Based on the chart above, GTM expects Trina to retain positive
gross margin for the whole period, while Renesola, JA Solar (NASD:JASO),
Sharp (OTC:SHCAY),
and Gintech (Tiawan:3514) will regain positive margins in 2014.
If Trina maintains positive margins, First Solar
and perhaps Yingli will probably keep positive margins as well.

Hence First Solar, Trina, and Yingli are likely to be the safest
ways to play a turnaround, while Renesola looks like the stock
most likely to give outsized returns in 2013 and 2014.

With margin pressure continuing in 2012, and GTM forcasting 21
Gigawatts of existing capacity to be retired by 2015, now is
probably still too early to get back into solar stocks. When
playing a turn around, getting in too early can make you as broke
as Evergreen
Solar.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 09, 2012

11 Clean Energy Stocks for 2012: July Update

Tom Konrad CFA

June
was a month of recovery for the stock market in general and clean
energy stocks to a somewhat lesser extent.

The Russell 2000 index (^RUT, which I use as a broad market
benchmark in this series) was up 9% in June, while the Powershares
Wilderhill Clean Energy ETF (PBW)
gained 5.3%. So far for the year, ^RUT has produced a total
return of 9.5%, while PBW shows a loss off 12.2%.

My model
portfolio introduced in January of 11 equally-weighted clean
stocks lost ground yet continues to outperform the clean energy
index fund PBW, down only 3.8% for the year (up 2.4% for the
month.) Since the broad market is up for the year and the
month, the hedged portfolio trails, down 9% for the year and is flat
for the month.

I continue to believe that my model portfolio's out-performance of
the sector is largely due to my avoidance of the moribund solar
sector, which has declined 40% since the start of the year, even
after a 63% decline in 2011, as measured by the Guggenheim Global
Solar ETF (TAN).
I don't expect a significant solar stock revival until
at least 2013, so I think avoiding solar will remain a good
strategy for the second half of 2012.

Stock Notes

Among the individual stocks in the portfolio, my investment in
solid European companies with global sales Veolia (VE,
+9%), Rockwool (RKWBF,
ROCK-B.CO, +12%), and Accell Group (ACCEL.AS,
+4%) continues to pay off, especially in June which saw some
easing of concerns about a European breakup, when the three
returned 0%, 8%, and 6%, respectively.

In the last month, Rockwool announced
a new factory in North America in response to robust demand
for their fire-resistant insulation, Veolia continued
to make progress in its restructuring with the sale of it's
UK water business and discussions with buyers over its US waste
business and a stake in its transportation unit.

Relatively weakly capitalized companies Lime Energy (LIME,
-30%), New Flyer Industries (TSX:NFI / NFYEF,
+20%), Western Wind Energy (TSX:WND, WNDEF,
-32%) and Finavera Renewables (TSX-V:FVR, FNVRF,
-58%) were mixed in June (-6%,-3%,-2%, and +6% respecitively) but
these companies have declined so much in previous months (or the
previous year, in New Flyer's case), that all currently look like
they are bottoming.

As I wrote in May, I expected a buying opportunity in LIME after
the market had digested a first quarter earnings
disappointment. I purchased shares a couple weeks ago at
$3.23, near where the stock is currently hovering.

New Flyer gave
notice of its long-indicated intent to redeem its 14%
subordinated notes in August, the redemption of which will be
funded with the proceeds from the much cheaper 6.25% convertible
debentures. The exchange will greatly strengthen New Flyer's
cash flow and should make the company more attractive to new
investors, especially income investors attracted by New Flyer's 9%
forward dividend yield.

Western Wind Energy has still not received an overdue Federal
cash grant which had several readers asking me what was going on
with the stock. The company remains confident that the grant
is just delayed, and I could find no reason to think otherwise
when I looked
into it.

Waterfurnace Renewable Energy (TSX:WFI
/ WFIFF) posted a solid 4% return in June, for an 11% total
return for the year. Waterfurnace recently launched the
world's most efficient commercially available heat pump based on
variable speed technology. I'm currently talking to
contractors about installing a geothermal system in the oil-heated
home I bought in January, and Waterfurnace's Series 7 will
definitely be one to consider.

Waste Management (WM)
and Honeywell (HON)
produced modest gains for the month (+1% and +3%) and year to date
(+3% and +2%.)

My Trades

I expect the stock market to continue to be rocky through the
second half of the year, but so far I'm happy with the additions
to my holdings of New Flyer, Accell, Waste Management, and
Waterfurnace I wrote that I'd bought in May.

With the market strengthening in June, I made fewer purchases
from this list, only Waterfurnace at $15.48, Western Wind at $1.15
and 1.20, and Lime at $2.24.

I sold my shares in Veolia at $12.3-12.50 early in the month, as
I had indicated I would probably do when I wrote
about trash stock in early May. Veolia is currently
trading at $11.17, and I'll consider repurchasing it if it goes
much lower, since I like the progress the company has made on its
restructuring since I sold.

The Western Wind purchase was just speculation that the tax grant
would come through, and put me over my target allocation, so I
took the opportunity to sell the extra shares for a quick profit
when the stock got to $1.32 on Friday, even though we have not yet
seen the tax grant. Part of the reason for the quick
turnaround was that this pair of buy/sell trades had the benefit
of effectively moving part of my Western Wind position out of my
IRA and into my taxable brokerage account. I'd initially
bought the Western Wind in the IRA because that's where I had cash
when I was buying the stock last October, but I generally prefer
to hold income style investments in the IRA and speculative equity
investments in the brokerage account because of differences in tax
treatment.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

Alterra Power: Cash to Invest

Tom Konrad CFA

I sometimes think Alterra
Power (TSX:AXY, OTC:MGMXF)
is unfairly lumped with other small, renewable energy developers.

A typical problem for small developers over the last few years
has been raising the funds to invest, even when they have
compelling prospects. For instance, Western Wind Energy
stock (TSX:WND,OTC:WNDEF)
has been beat up recently because a large Federal
cash grant is delayed. Finavera Wind Energy (TSXV:FVR,
OTC:FNVRF)
has been declining for most of the year as they look for a
strategic partner to help fund their permitted wind developments,
despite significant progress permitting those projects and
obtaining a bridge
loan to fund operations and development in the meantime.

Alterra, on the other hand, has plenty of cash on its books to
invest, and does not need to look for partners. Two news
items today drove that point home. First, they announced
that their Dokie Wind Farm (which commenced commercial operations
in 2011) had funded its loan reserve and commenced equity
distributions back to Alterra. Second, that the company had
received
an unsolicited offer for their stake in their HS Orka
geothermal plant in Iceland.

With $57 million cash on the books ($0.12 per share), Alterra has
no immediate need to sell its 66.6% stake HS Orka, but it has
agreed to explore the deal. Alterra’s VP Corporate
Relations, Anders Kruus, stated, “[W]e felt we should consider
this unsolicited proposal if it maximizes value for Alterra
shareholders and is supported by Icelandic stakeholders.” In
other words, they’ll sell if the price is right and it does not
cause political waves in Iceland, where Alterra plans to continue
to do business.

It’s a nice position to be in, and maybe investors are starting
to recognize it. The stock is up C$0.05, or 13.5% to C$0.40
as I write, although it’s still trading at only a little more than
50% of book value.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 08, 2012

Special Report on Drought and Biofuels

Dire US media headlines abound: “Drought!”

What’s real, what’s hype, and what are the impacts?

More importantly, what alternatives does science give us now, and
in the future, with more drought-tolerant energy and food crops?

The Reuters report could not have been more stark this week from a
field in Illinois.

“We’re in a critical point, could be the beginning of the end,” said
Dave Kestel, a farmer, in a Reuters report that ran yesterday.
Kestel’s plants in Manhattan, Illinois, the news service reported,
“are almost two feet shorter than they should be at this point in
the season and the next two weeks are critical.”

A Yahoo report that ran last night and was in the Top Story feed
July 6 brought more bad news: “Just under 56
percent of the contiguous United States is in drought conditions,
the most extensive area in the 12-year history of the U.S. Drought
Monitor. The previous drought records occurred on Aug. 26, 2003,
when 54.79 percent of the lower 48 were in drought and on Sept 10,
2002, when drought extended across 54.63 percent of this area.”

Here’s a drought
animation, that gives you a sense of the spread of drought
conditions over the past 6 weeks.

Time to panic? The Yes and No arguments

So, should we be hugely worried that – for example, the corn harvest
will be massively affected, prices will skyrocket, and food vs fuel
concerns will breakout even as US ethanol distilleries, facing
escalating feedstock prices and static fuel prices, cuts back on
production? Is a disaster in the making?

The Yes argument. In New
York, a Reuters report, based on the latest ethanol production
numbers, advises that it is so. “The ethanol industry is bracing for
its worst spell since the bankruptcy-ridden days of 2007 and 2008,”
the news service opined, after US ethanol production dropped to its
lowest levels in 10 months. US blend wall issues, corn prices, and
falling corn stocks in the face of a persistent hot, dry spell in
the US Midwest are among the causes of concern. US ethanol
production fell to 857,000 barrels per day as three ethanol plant
shutdowns affected production results. Meanwhile, a Linn Group
analyst told Reuters that ethanol margins are 20 cents below the
minimum viability point. More
on that story.

The No argument. So far, the
drought is highly regionalized, especially with respect to corn. For
example, in terms of corn condition, 50 percent of Indiana corn is
rated very poor or poor, while only 10 percent is rated thus in Iowa
and 4 percent in Minnesota. The average is 9 percent. This according
to the
latest weekly publication from USDA, here.

And again, let’s look at last year’s report from NDMC on conditions,
just to calibrate that data against a not-so-bad year. How much
worse is this year? Well, so far, its better.

“Nearly 12 percent of the contiguous United States fell into the
“exceptional” classification during the month, peaking at 11.96
percent on July 12. That level of exceptional drought had never
before been seen in the monitor’s 12-year history, ” said Brian
Fuchs, UNL assistant geoscientist and climatologist at the NDMC, in
assessing July 2011 conditions.

And, last year, the US Drought Monitor warned that “The percent of
contiguous U.S. land area experiencing exceptional drought in July
reached the highest levels in the history of the U.S. Drought
Monitor.” More
on that story.

Stay tuned

“The recent heat and dryness is catching up with us on a national
scale,” said Michael J. Hayes, director of the National Drought
Mitigation Center. “Now, we have a larger section of the country in
these lesser categories of drought than we’ve previously experienced
in the history of the Drought Monitor. So far, just 8.64 percent of
the country is in either extreme or exceptional drought. During 2002
and 2003, there were several very significant droughts taking place
that had a much greater areal coverage of the more severe and
extreme drought categories,” Hayes said. “Right now we are seeing
pockets of more severe drought, but it is spread out over different
parts of the country. It’s early in the season, though. The
potential development is something we will be watching.” More
on the story.

The corn and soy impact

Overall, the corn crop projection is a mixed bag, with high acreage
offset by poor crop condition.

2012 Corn planted is 96.4 million acres, up 5 percent from 201, with
projected harvest at 88.9 million acres, up 6 percent. Soybeans
planted are at 76.1 million acres, up 1 percent, while harvest
is projected at 75.3 million acres, up 2 percent. Wheat planting is
at 56 million acres, up 3 percent. 48 percent of the US corn crop is
rated in “good to excellent” condition, down 8 points from
last week and 21 below 2011, in what is the lowest rating since
1988.

Useful links to keep an eye out for

What’s being done in crop R&D about drought-tolerance

Nature reports new drought tolerant maize strains released by
Pioneer. “Last week, DuPont (DD)
subsidiary Pioneer Hi-Bred International, headquartered in Johnston,
Iowa, announced plans to release a series of hybrid maize (corn)
strains that can flourish with less water…Pioneer says that field
studies show its new hybrids will increase maize yields by 5% in
water-limited environments.” More
on the story.

Improvements in plant stress response. “When a plant encounters
drought, it does its best to cope with this stress by activating a
set of protein molecules called receptors. A team of plant cell
biologists — led by Sean Cutler, an associate professor of plant
cell biology at the University of California, Riverside — has
discovered how to rewire this cellular machinery to heighten the
plants’ stress response. It’s a finding that brings drought-tolerant
crops a step closer to becoming a reality.” More
on the story.

Plants subjected to a previous period of drought learn to deal with
the stress thanks to their memories of the experience, new research
has found. “This phenomenon of drought hardening is in the common
literature but not really in the academic literature,” said Michael
Fromm, a University of Nebraska-Lincoln plant scientist who was part
of the research team. “The mechanisms involved in this process seem
to be what we found.” Working with Arabidopsis, researchers found
that pre-stressed plants bounced back more quickly the next time
they were dehydrated. Specifically, the nontrained plants wilted
faster than trained plants and their leaves lost water at a faster
rate than trained plants.” More
on the story.

Biofuels and energy crop developments in drought tolerance

Super-performing corn hybrid. In
February, University of Illinois researchers developed a new maize
hybrid that they report will produce as much as 15% to 20% more
biomass given the same amount of fertilizer as commercial
hybrids. The hybrid is a mix of both tropical and temperate
maize, with increased drought resistance and sugars in the corn
stalk, while lowering vulnerabilities to pests and diseases.
The researchers state that the increased stalk sugars will increase
ethanol production. More
on the story.

Drought-tolerant corn trait.
Last December, the U.S. Department of Agriculture deregulated MON
87460, Monsanto’s first-generation drought-tolerant trait for
corn. Drought-tolerant corn is projected to be introduced as
part of an overall system that would offer farmers improved
genetics, agronomic practices and the drought trait. Monsanto plans
to conduct on-farm trials in 2012 to give farmers experience with
the product, while generating data to help inform the company’s
commercial decisions. The drought-tolerant trait is part of
Monsanto’s Yield and Stress collaboration in plant biotechnology
with Germany-based BASF. More
on the story.

Stress-related hormones enable
plant response. In December, researchers at UC Riverside
reported a way to heighten a plant’s cellular response to
drought. Plants under drought stress produce abscisic acid, a
stress hormone to help the plant survive. The research,
conducted at the laboratory of Associate Professor Sean Cutler, has
now succeeded in supercharging the plant’s stress response pathway
by modifying the abscisic acid receptors so that they can be turned
on at will and stay on. This could bring drought-tolerant
crops a step closer to becoming a reality. More
on the story.

Genetic mutation enables drought
endurance. Last year, researchers at Purdue University
found a genetic mutation that allows a plant to better endure
drought without losing biomass. During drought conditions, a plant
might close its stomata to conserve water which also reduces the
amount of carbon dioxide it can take in, limiting photosynthesis and
growth, but the discovery shows plants with a mutant form of the
gene GTL1, did not reduce carbon dioxide intake nor lose biomass. It
did have a 20 percent reduction in transpiration, however. More
on the story.

Who’s working on drought-resistance energy crops?

In specific bioenergy crops, companies such as Ceres (CERE,
switchgrass, energy cane in the Blade energy crop family) and Mendel
Biotechnologies (miscanthus) have been garnering the most attention
as they bring new traits forward for the new integrated
biorefineries utilizing energy crops. SG Biofuels are also working
on traits related to jatropha, which has a history of low-water
tolerance.

The bottom line

For now, expect panic – more
investors will be reading Reuters and Yahoo than Biofuels Digest or
AltEnergyStocks, and can be expected to freak out. Impacts may
include – corn ethanol production shutdowns, rising corn prices,
rising RIN prices as obligated ethanol blenders look around for
alternatives, or rising ethanol prices as the blenders chase product
with price. Corn stocks may fall as hoarding commences and high
prices bring out all the sellers.

It’s real, but not yet dire. For now, know that drought is real and
widespread, but not as exceptionally severe today, across the US, as
even last year’s more limited drought conditions.

It’s regional, so far. The
drought has kept away from major ethanol producing states, by and
large, like Iowa, South Dakota, Minnesota – but is hitting Illinois
and Indiana hard.

July is key. July always is
key – it’s just a critical rain and heat month, for crop yields.
This year more than ever.

Science is advancing. Keep
in mind that crops are more resistant than in the past to
environmental stress.

Be vigilant, investor! When
panic and worry spreads, and information is scarce, there’s money to
be made in the markets, but it requires nerves of steel to keep your
cool when everyone around you in losing theirs.

July 07, 2012

Where's Western Wind Energy's Tax Grant?

Tom Konrad CFA

On March 22, Western Wind Energy (TSX-V:WND, OTC:WNDEF)
applied for a $90,556,707 tax-free 1603 grant from the US Treasury
on behalf of the completed 120MW Windstar project. The press
release stated that the grant is subject to approval by the Treasury
and payable within sixty days.

The Windstar Wind
Farm. Photo credit: Western Wind Energy

It’s now more than three months later, and no tax grant.
The stock is down 24% since May 22, when the grant was
expected, but management remains confident they will get the
grant. In the company’s May
30 quarterly earnings announcement, the
company said,

Our application has exceeded the 60 day program
guidance review period and we continue to monitor our
application status on a daily basis. We are not aware of any
issues associated with our application and through our network
of advisors we believe a majority of the applications are
delayed.

The Western Wind CEO Jeffrey Ciachurski had to attest to this
statement under the Dodd-Frank rules, so we can be confident he
believes the grant is just delayed, and will not be denied.
In a phone interview on Friday, he told me flat out that
“There is no risk to the cash grant,” and “most 1603 applications
are running late.” He also told me that the company has
attended legal seminars on 1603 grants, and the average deviation
(amount the grant is reduced by Treasury) is 3%, so we can expect
Western Wind to receive about $88 million.

According to Western Wind, the reason the 1603 grants are running
late is because of a flood of solar applications as the program
expired at the end of 2011, and because there is pressure on
Treasury to vet applications very carefully given the current
charged political climate in Washington.

When I was at the Renewable
Energy Finance Forum, Wall Street last week, I tried to get
independent confirmation of the company’s statement that most 1603
grants are running late. No one was able to give me direct
confirmation. Most industry insiders told me they would not
be surprised if that were the case, but they did not have any
personal knowledge. I also asked Richard
Kauffman, Senior Advisor to the Secretary of Energy in the
Department of Energy (DOE). Although DOE helps
the Treasury vet 1603 grants, he had not heard anything
about grants being delayed.

I also got in touch with a source at Treasury, who was not
willing to talk on the record. That source did say that
Treasury’s “policy” is a 60 day turnaround. The source
said that I should not assume that the grant would be denied just
because it had not yet been granted, as there are reasons a grant
might take longer than 60 days to process.

Conclusion

Western Wind is still confident they will receive the tax grant,
and the Treasury Department did not deny that many 1603
grants are delayed. It makes a certain amount of sense to me
that if most 1603 grants are running late, Treasury is not willing
to come out and say that’s the case: it would not make them look
good. The fact that my Treasury source did not deny that
grants are running late and was unwilling to go on the record,
lends credence to the possibility that many grants are late.
After all, if everything were running smoothly, why not just
say so?

Overall, I think the chances of Western
Wind receiving the grant are very high. I recently
bought more stock at $1.15 on the gamble that I’m right, but to be
perfectly clear, it is a gamble. While the chances seem very
low to me, if Western Wind does not receive the tax grant, it
could easily bankrupt the company. Western Wind had only
$272,720 in unrestricted cash on hand at the end of May, and has
substantial project-related debt that it plans to pay down with
the grant proceeds. If the tax grant were denied, I can’t
imagine there would be many lenders willing to step up and fill
the breach.

On the other hand, I can’t find any reason to believe that the
Windstar project should not qualify for the 1603 grant.
If the grant were to be denied, what would be the basis for
denial?

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 06, 2012

GE To Delay Colorado Thin-film Manufacturing Plant

Now, energy giant General Electric (GE)
said it is putting plans for its Aurora,
Colo., plant on hold for 18 months in reaction to the
continued drop in crystalline silicon solar panels. When the
company announced its plans to jump into American
thin-film manufacturing nine months ago, it did so in
grand fashion. Company officials unveiled a plan for a
400-megawatt (MW) facility that would churn out cadmium
telluride (CdTe) panels, the same thin-film technology
deployed by Abound. It was an American manufacturing success
story born out of Primestar, which GE purchased in 2011.

GE wasn’t preparing for a soft launch. It was
pushing ahead hard and fast with the goal of becoming a
U.S.-based solar manufacturing leader. To that end, it laid
out a plan to introduce a module at 14 percent efficiency or
higher and that the product would hit the commercial market by
2013. Now, company officials say they will delay the new plant
so they can work on beefing up the efficiency. That was the
same approach announced by Abound, when it said this winter
that it would temporarily shut down its Colorado lines to work
on efficiency. Four months later the company announced it would file for bankruptcy.

So now, U.S. manufacturing has lost two of its
biggest prizes — one a startup and the other an industry
leader. In addition to the 400 MW the GE plant was to produce,
it would also have created about 350 new jobs.
The 640-MW plant that Abound received a Department of Energy
loan guarantee to build in Tipton, Ind., represents another
1,000 jobs.

GE, to be sure, is a stable, diversified company.
It also remains a player and investor in many renewable
technologies. It’s proven to be a company willing to take a
chance on technologies that it feels can win a significant
segment of the market. Many will surely see the announcement
as a lack of confidence in thin film going forward.

The company exuded confidence nine months ago,
just as the industry was bracing for trade action against
Chinese crystalline silicon panels that were driving down
costs and profit margins for American manufacturers.

“With so much capacity out there, the only
companies that can compete are the ones with the right
technology and the right cost structure,” said Matt Guyette,
GE’s strategy leader for renewables, during a conference call
last October. “There’s a lot of companies out there with the
wrong cost structure. We see it with their quarterly reports
and some of the bankruptcies in the past few months.

“We’ve been watching the space for over 10 years,
and we’ve been investing in technologies, and the reason we
have not built this plant before is that the technology was
not at a point where we were confident that we could compete.
We’re there now. We’re confident and we’re scaling up.”

While the company is saying that it will forge
ahead, the delay illustrates once again how rapidly the solar
industry is changing.

Steve Leone is an Associate Editor
at RenewableEnergyWorld.com.
He has been a journalist for more than 15 years and has worked for
news organizations in Rhode Island, Maine, New Hampshire, Virginia
and California.

The Next Trend: Integrating PV with Solar Thermal

Since before I started writing about investing in clean energy in
2006, I’ve been fascinated
by Concentrating Solar Thermal Power (CSP.) CSP held
the promise of much cheaper energy than was then available from
photovoltiac (PV) solar, combined with thermal storage, which
eliminated the variability problems of PV. Unlike other
renewable energy able to produce baseload power (geothermal,
biomass, and hydro), CSP is scaleable: The solar resource in areas
appropriate for CSP is large enough to easily meet the
world’s energy needs.

Today, things don’t look as good for CSP. Large, central
CSP power plants take years to permit and connect to the grid.
They work best in areas with low cloud cover, mostly
deserts. The least expensive CSP plants also require water
for cooling (air cooling is possible, but reduces efficiency and
so increases the cost of power.)

The large scale of CSP projects also makes it harder and slower
to arrange financing. The loss of the US Department of
Energy loan guarantees last year dealt a harsh blow to
the industry. Once-successful CSP developer
Solar Millennium, which had been granted a conditional
commitment under the program, declared bankruptcy when they could
not finance a project within the DOE-imposed deadline.

Slow permitting and financing means that only a few CSP plants
have yet been built. Meanwhile, distributed PV installations
have been growing rapidly, giving manufacturers and installers
valuable experience, leading to rapid cost cutting. As a
result, the world will install 27 GW of PV in 2012. Total
installed CSP capacity is about 3 GW.

The accelerated learning curve has allowed PV shoot past CSP in
cost per kilowatt of power generated. While CSP was plodding
down the cost curve, PV dove off the cost cliff. As I wrote
in November, many planned CSP
projects are being displaced by PV or being canceled.

Friend or Foe?

All is not lost for CSP. While PV is ahead on price, CSP
still has one valuable asset PV can’t match: cheap storage.
Micheal Whalen, CFO of CSP company Solar Reserve, said the
idea of integrating CSP with PV was “of interest” at the Renewable
Energy Finance Forum- Wall Street in response to an audience
question. This might make sense for large scale solar farms,
since the integration of PV would allow the overall price of power
to be lower than CSP alone, while CSP would be able to compensate
for the rapid output changes from PV that occur whenever a cloud
passes over, as well as producing power at night, or shifting it
ot peak afternoon periods.

CSP/PV hybrid farms might be particularly appropriate in places
like Saudi Arabia, which has recently committed itself to large
solar investments. While the low water use and cost of PV
will appeal in the desert kingdom, the fact that solar will be
displacing power generated from oil means that even CSP based
power will produce cost reductions. Large solar
installations like what Saudi Arabia is contemplating could easily
destabilize the grid if they were to consist entirely of variable
PV. Mixing in dispatchable CSP power would help maintain the
stability of the whole system.

As Mr. Whalen said, “There is a place for CSP even when PV is
cheap, if it differentiates itself [with storage].” The best
markets for CSP will be places like Saudi Arabia and South Africa
where “they do not have robust grid connections.” Without
robust grid connections, PV’s variability can easily destabilize
the grid, giving CSP a role in grid stabilization.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

July 05, 2012

Energy Independence Day

Yesterday, in the United States the bands and bunting were
on display, because it was Independence Day. But is freedom really
sustainable, without energy independence too?

It would be a sweeter thing, political independence, if it were
accompanied by more energy independence. For examples, choices at
the pump that didn’t involve wealth transfers to people who oppose
the principle of ballot boxes.

But before there is energy independence, there has to be more
freedom from the entropy that afflicts the energy business, and
especially the bioenergy business.

Hmm, entropy, er, what’s that again?

Well, there are millions of tons of gold in the oceans, so why
aren’t fisherman all millionaires? That’s entropy, the tendency of
everything to reduce from useful concentrations to a smooth
distribution. In the case of gold in seawater, the concentrations
are so low, in parts per million, that the extraction cost
exceeds the value of the metal.

The entropy problem in feedstocks

In bioenergy, it’s the chief reason, for example, that otherwise
perfectly acceptable fruit waste from citrus harvest is a
difficult feedstock for energy production. The process for
cellulosic conversion was discovered in the 1990s – so what’s the
hold up? Just not enough fruit waste in a given target area,
and the proposed stand-alone refineries are limited so far to an
unprofitable 4 million gallons.

Think of what a different world it would be if certain residues
were sufficiently concentrated. For example, there is 2 billion
tons of MSW produced each year, according to a Columbia University
estimate. Right there, you have the means to produce some 160
billion gallons of biofuels.

The entropy problem in capital

So, why is the world not awash in cellulosic biofuels from MSW?
Well, capital is subject to its own entropy – it never seems to be
in the right hands at the right time, never concentrated enough in
the hands of those who can afford big risks. Instead, it is
distributed across lots of smaller portfolios that, generally,
take much smaller risks. Greenfield biorefineries are a tough sell
in tough times. There’s entropy, again.

Which brings us to corn stover and cobs – these days, generally
just left in the field. POET Biomass estimates that you can
acquire enough cellulosic feedstock, from the area serving a 100
million gallon corn ethanol plant, to add 25 million gallons in
capacity. Right there, you have, in the form of corn ethanol
biorefinery bolt ons, the capacity to add 3.5 billion gallons of
cellulosic capacity.

Now, that’s entropy at work, again – because about 22 percent of
the US corn harvest goes to corn ethanol – meaning there’s an
awful lot of cobs and stover lying around, that simply is not near
enough to an existing corn ethanol plant. Applying the POET
Biomass math, it’s a fair estimate that there is perhaps another
15 or 16 billion gallons in capacity available, by finding ways to
aggregate cobs and stover.

Which brings us around to in-field pre-processing. It’s simply
going to have to become a given, in combine harvesting, to pick up
the cobs and stover in a one-pass system. Which makes it sad to
see small businesses, like the team behind the FARM MAX
biomass harvesting technology, struggle for investor attention and
support.

Piloting an integrated bioeconomy

Now, that’s something the Midwestern Governors Association, which
has a task force on biorefining and biofuels, might usefully
tackle. Instead of handing out incentives for plant construction,
why not incentivize lower costs for biomass collection, and help
put in the pumps. By concentrating demand and supply, you can open
up markets – by fighting entropy.

It doesn’t have to be a big government hand-out. Hand-outs, as we
have discovered, rarely solve market problems and create new
perceptional ones. As if states were awash in money, anyway. It
means using the organizational power of government, as opposed to
the taxing power. Organizing one, small area to become an
exemplar to a wider world. Car dealers, growers, processors,
financiers and state government, all have a stake in a positive
outcome, and could and should be counted on to bear some of the
cost.

Not too long ago, Greensburg, Kansas embarked on a hugely
ambitious experiment in green living – too ambitious, probably,
though many good things have come of its commitment, which
followed the devastation wrought by an F5 tornado. The principle
of picking out one or two towns, or a small region, is a good one.

Why, towns might vie for such an honor, with a resulting local
organization that produces the kind of cooperation and
cost-sharing that we see in, say, cities that have organized an
Olympics or a world’s fair. Doesn’t have to be a major
metropolitan city, as in the case of an Olympics. Blair,
Nebraska…Shenandoah, Iowa…well, a lot of small towns could work
this kind of magic.

Of course, it’s not something restricted to the United States.
Towns from Canada to Denmark, South Africa to China, India to
Brazil could mount such an effort.

Been done before

Two hundred years ago, a similar approach – a pilot scheme, using
a fledgling, underpopulated United States – worked wonders for the
principles of freedom of opportunity and political independence.
Whole swathes of the wide world are today organized along the
principles established by Washington, Adams, Jefferson, Franklin
et al, back in 1776. Democracy and freedom won a worldwide
following, once it was proven that liberty, in fact, is a driver
of happiness and prosperity.

We suspect a similar effort on energy independence might reap a
similarly impressive harvest. A new birth of energy freedom,
my what a good outcome that would be. Especially for all those
small towns that have borne such a heavy burden to establish those
political freedoms that we enjoy today.

July 04, 2012

When Will Polypore Payoff?

by Debra Fiakas CFA

Diagram of a battery with a
polymer separator.

Lithium ion batteries make it possible to recharge your smart phone,
camera and a multitude of other
have-to-have-with-us-every­-moment devices. Yet the
average person knows very little of the inner workings of something
so important to our daily lives. One little item in a battery
is a highly specialized membrane that fits neatly between opposing
electrodes - the positive and negative poles that make
an electrical charge. This membrane manages the charge and
discharge process.

These membranes are so vital and the technology so particular,
battery makers rely on membrane experts like Polypore International,
Inc. (PPO:
NYSE). Polypore operates under the Celgard and Daramic brands in this
market. Last year Polypore announced a $105 million expansion
of its lithium ion separator manufacturing capacity. The
expansion is expected to be completed in 2013 and become operational
in 2014. Polypore had already expanded production capacity for
its polyethylene battery separators used in lead-acid batteries.

With demand for batteries increasing each year, the news should have
ignited shareholders. Instead Polypore shares are trading 46%
off the 52-week high. High net profits and strong cash flows
cannot be the problem. Polypore earned $98.3 million in net
profit or $2.08 per share on $751.1 million in total sales over the
last year. Operations generated $137.0 million in cash.
That represents a net income margin of 13.1% and a cash conversion
rate of 18.2%.

Shareholder’s tepid response to expansion could be Polypore’s
balance sheet. At the end March 2012, long-term debt was
$706.2 million, making Polypore’s debt-to-equity ratio 1.33.
That may not seem particularly weighty, but cash stood at a paltry
$79 million. For some investors, Polypore may appear to have a
little financial flexibility.

If there was a time that Polypore needed to be agile it is now. The
company has competitors coming at it from all sides. Besides
energy devices, Polypore’s membranes are used for filtration in
medical devices such as those that perform hemodialysis and blood
oxygenation processes. Polypore’s filtration membranes also
have applications for industrial equipment to clean sub-micron
particulates from liquids or gasification processes. Polypore
has competitors in each group. Asahi Kasei Chemicals
Corporation based in Japan is one of the few that competes in with
Polypore in all markets.

PPO is currently trading at 19.4 times trailing earnings.
However, analysts following Polypore have plenty of enthusiasm for
the company’s future. They have pegged next year’s earnings at
$3.09 per share, implying a forward price earnings ratio of
13.1. That is a compelling valuation for a stock with a beta
of 0.45.

I do not have a precise timing for when Polypore shares will pay off
for investors. However, at the current depressed price level
should give investors with the patience for a buy-and-hold strategy
to find out.

Debra Fiakas is the Managing
Director of Crystal
Equity Research, an alternative research resource on small
capitalization companies in selected industries.

What I
have come to believe is we have a modern version of that in
the SunShot program where so much intellect has come
together that we will actually change the future in a
positive way.

In a
transformational rethink of solar strategy, the SunShot
Initiative set aggressive goals for module and systems costs and
elevated the importance of reducing soft costs and the grid
integration of non-dispatchable solar resources to the
same level as solar
technology cost reductions and innovation.

Revisiting
the PV Learning CurveThe SunShot goal of $1.00 per Watt ($/W) installed
utility scale PV systems and $0.50 per Watt modules was greeted
with skepticism by the PV industry and looked impossible
relative to the historical PV Learning Curve established over
some 35 years predicting a twenty percent (20%) reduction in
module manufacturing cost with every doubling of global
cumulative installations. The PV Learning Curve was once again
validated when polysilicon shortages pushed modules prices
higher in 2005 but returned to the trend line in 2009.

Recent PV
industry developments have challenged the mechanical evolution
of the learning curve. In 2011, module prices dipped below the
learning curve at $1.25/W followed by IHS iSuppli’s prediction of
crystalline silicon solar module prices hitting $1 per Watt by the first
quarter of 2012. The PV industry asked: “Where could they
have gotten that aggressive a goal? Nothing like that could
ever possibly happen.” I too was skeptical of the later
prediction at the time.

Furthermore,
Yingli Green Energy Hold. Co. Ltd. (NYSE:YGE) and Trina Solar
Limited (NYSE:TSL) have announced
plans to achieve manufacturing costs of $0.70/W or less by the
end of 2012. And bids for installing large scale PV plants are
now in the $1.20 to $1.70 per Watt range.

Dr. Swanson
said:

The
learning curve has taken a jog very likely. There are many
reasons for this, but I firmly believe that one of the
reasons is the slap in the face that these
audacious goals that came out of the SunShot
program gave our community.

“The
Swerve” is the only explanation for the shift of the PV
Learning Curve along a path aligned with the SunShot goals.

Dr. Swanson
credits SunShot with accelerating SunPower’s roadmap to $1/W
monocrystalline silicon back contact modules by one year to 4Q
2013.

Arranging
the c-Si value chain from polysilicon to systems according to
cost, the module and installed system portion now account for
59% of the cost: 21% for the module and 38% for the system. Of
course, SunPower’s consistent strategy leveraging cell
efficiency to reduce module and system costs dovetails with the
observation.

After
reviewing SunPower’s latest module with greater than 21% total
area efficiency based on Gen 3 solar cells, Dr. Swanson said: “It
will not be very long in the future before 20% will become the
standard silicon solar cell.”

By smashing
the $1/W module price metric, c-Si has become a front running
solar technology in the SunShot race with established scale
advantages, a moving target of increasing efficiencies, and a
proven technology for manufacturing investments and field
installations.

Other
perspectivesA week later at TechConnect
World 2012 in Santa Clara, California USA, additional
viewpoints were expressed on the PV Learning Curve.

On a
log scale module reductions have been virtually linear
through the growth of the solar industry until 4Q 2011 when
it dropped off well below the line.

Dr. Perry
observed there was probably not a lot of room left for cost
reductions in the material portion of modules. Efficiency
improvements, increasing module reliability and durability, and
reducing system cost, not just module costs, are the three keys
to reducing the overall PV system LCOE (Levelized Cost of
Energy). Extending module lifetimes beyond 25 years to 30 or 40
years while maintaining 90% power output was mentioned as a
possible, achievable target to further reduce LCOE.

What
is interesting is that as we track recent quotations in the
market, we are seeing that the price per watt is tracking
below all of these trend lines. So the
question is can the market sustain this?

Will
we come out of this curve because of the oversupply
situation or will we continue it, and the answer remains to
be seen.

Mr. Chen’s
takeaway was “the traditional trajectory of cost reduction
is being accelerated” and increasing cell efficiency
should be the focus for further reducing the cost per Watt.

However, critics argue
the SunShot goals are harmful to the PV
industry and the current pricing is unsustainable. These
arguments will be confirmed if module pricing returns to the PV
Learning Curve as the market shakeout and consolidation resolves
itself over the coming quarters and years.

July 02, 2012

Is Ocean Energy More Than "A Very Expensive Hobby"?

That was the question posed to industry experts at the EnergyOcean
International conference and exhibition that took place in Danvers,
Mass., this week. Referring to three levels of development — Epoch
1, 2, and 3 — Andrew Tyler, CEO of Marine Current Turbines (MCT),
a company now owned by Siemens (SI),
gave a few key pointers to companies interested getting beyond the
“very expensive hobby” stage of ocean energy development.

While his tongue-in-cheek reference to marine and tidal energy
development was sarcastic, the sentiment was real. It’s a
pricey endeavor. The proof-of-concept stage will run about
$1 million, he said. The small-scale stage will run $2
miliion to $5 million and to get to the full-scale prototype
stage, a company will need to have $15 million to $30 million at
its disposal. Tyler said that for financing companies should look
to venture capitalists or government because “banks won’t touch
them” since the risk is just too high.

How Can Start-ups Get Funding?

As with all renewable technologies, especially nascent ones like
ocean energy, reducing costs is key to advancing the industry.
Tyler said in order to attract any financing, technology risks
must be as minimal as possible. Even venture capitalists “won’t
touch a science experiment," he said. He encouraged
start-ups to focus on sites that will be easy to develop, instead
of those that might be the “juiciest” in terms of energy
potential. The ocean energy industry could learn from the offshore
wind industry, which started going after resources that were
easier to tap rather than deepwater sites that are more
complicated to develop.

In order to get financing, start-ups must have an unrelenting
focus on reducing the levelized cost of energy (LCOE) to the point
where it is “at least in line with other renewable energy
sources,” Tyler said. He also encouraged those interested in
becoming part of the industry to focus on areas down the value
chain where they could reduce costs. He told me that he
often gets calls from inventors who have a patent but no money and
who would like Siemens to invest in them. Once in a while, he said
he would take a meeting with them to see if the idea truly is a
viable one. And these days, he’s more apt to take those
meetings if the inventor has an idea for how to make improvements
lower down on the value chain. “There is plenty of room for
innovation in the supply chain,” he said.

Even the most willing investor needs to feel confident that the
potential gains outweigh the risks of losing money. The
ocean energy industry should also, therefore, focus on lowering
the risks associated with investing in its technology.

Amanda Forsythe, a tax attorney with law firm Chadborne and
Parke, gave some examples of how the ocean energy industry
could help reduce risk. In the U.S., she said, the government
hasn’t been able to set a clear course for renewable energy
development. Forsythe explained that right now the biggest
risk that companies face is the “change of law” risk, i.e., the
expiration and non-extension of important tax incentives for
developers. She encouraged the industry to lobby for key
enabling policies like RPS set-asides or “carve-outs” for certain
technologies. For example, if coastal states were to require
that a utility meet a small percentage of its RPS with ocean
hydrokinetic energy, it would go a long way towards helping the
industry get off its feet. She also mentioned feed-in tariffs as a
great enabler but pointed out that with the onset of the financial
crisis in the EU, FiTs are losing their popularity even in Europe,
the region that championed them to begin with. Finally she
said that government loan guarantees also help to reduce risk for
investors and encouraged the industry to continue to fight for
them in the U.S.

MCT’s Tyler said that by 2020, his company would be building and
placing in service 100-MW ocean energy facilities and that
electricity costs will be in line with offshore wind. He expects
to get there by going into large-scale manufacturing and mentioned
plans to build a stand-alone facility in the future.

A large-scale manufacturing facility producing 100-MW ocean
energy turbines is certainly more than a hobby. For MCT,
which started in 1999 and put its first commercial scale tidal
turbine, the 1.2 MW SeaGen, in the water in 2008, the road was
long and full of struggles but the payoff — producing
cost-effective, clean renewable energy for generations to
come — is worth way more than a huge collection of
Faberge eggs.

Jennifer Runyon is managing
editor of RenewableEnergyWorld.com
and Renewable Energy World North America magazine. She also
serves as conference chair of Solar Power-Gen Conference and
Exhibition and Renewable Energy World North America Conference
and Expo.

July 01, 2012

Two EVs for the Other 99%

Tom Konrad CFA

The Tesla Model S, from the
unveiling on 26-Mar-2009. (Photo credit: Wikipedia)

An EV for the 1%

The chatter among electric vehicle (EV) enthusiasts and
investors is all about the launch
of the Tesla (NASD:TSLA)
model S. A cool ride, no doubt, but not many of us are ever
going to buy a sedan that starts at $49,900, even after the $7,500
tax subsidy.

Fortunately for the rest of us, this week also brought news about
two much more affordable EVs.

An EV for the 99%

Chicago EV enthusiasts will soon not have to stump up $50K to
ride an EV, they’ll be able to ride an EV for just $2.
That’s because the Chicago Transit Authority (CTA) just placed
the first order for two of New Flyer Industries’ (OTC:NFYEF,
TSX:NFI) recently
launched battery-electric transit bus. The CTA will pay $2.2
million for the buses, and will begin a pilot program to
understand how they will operate in Chicago’s harsh climate.

The buses come equipped with traction drives and
components from Siemens (NYSE:SI)
and will be delivered in 2013.

The vehicles may come from a variety of manufacturers, but only
Kandi Technologies (NASD:KNDI) was identified as having a model
approved for the program. The reporter was shown a Kandi
tw0-seater, and Kandi’s mini-EVs were identified by a local power
company official (which is a partner in the program) to “possibly”
be promoted as they are “more suitable for city driving.”

Another official stated that the rental fee would be low and
affordable to working class families. Previous articles have
put
the monthly rental at 800 yuan a month, or about $126, a
price which includes free charging and battery exchanges.
At such low rental prices, Kandi’s $7,500-$8,000 EVs will
clearly be favored over their competitors’ EVs, all of which cost
more than $20,000. The next-cheapest competitor, the Zoyte
Longhorn currently rents for 2400 yuan, or $380 per month in
Hangzhou, a price which does not include free charging.

Another reason to think that Kandi’s EVs will make up the bulk of
the program is the emphasis on battery exchange. Only
Kandi’s EVs were designed as electric vehicles from the ground up,
with plans for battery exchange. Competitors such as the
Longhorn are modified versions of gas vehicles, and have the
batteries under the back seat. This means that battery
exchange would require an empty back seat, and considerably more
time and effort than Kandi’s quick battery exchange system.

Although we’ve suspected
it for some time, this is the first official word that Kandi
has been selected as part of Hangzhou’s rental program. From
the evidence, it seems that Kandi’s vehicles will not only be
included in the program, but they will make up most of the planned
20,000 vehicles.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.